TATHAM OFFSHORE INC, 10-K, 1999-09-28

TATHAM OFFSHORE INC
10-K, 1999-09-28
OIL & GAS FIELD EXPLORATION SERVICES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO
---- ----

COMMISSION FILE NUMBER. 0-22892

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TATHAM OFFSHORE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 76-0269967
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

600 TRAVIS STREET
SUITE 7400
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 224-7400

-----------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
SERIES A 12% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
SERIES B 8% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
SERIES C 4% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
EXCHANGE WARRANTS

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K.
---

AS OF SEPTEMBER 15, 1999, THERE WERE OUTSTANDING 26,074,321 SHARES OF
COMMON STOCK OF THE REGISTRANT. THE AGGREGATE MARKET VALUE ON SUCH DATE OF THE
VOTING STOCK OF THE REGISTRANT HELD BY NON-AFFILIATES WAS AN ESTIMATED $1.2
MILLION.

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TATHAM OFFSHORE, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
JUNE 30, 1999

INDEX
<TABLE>

<S> <C> <C>
PART I.....................................................................................................1
Items 1 & 2. Business and Properties..................................................................1
Item 3. Legal Proceedings.......................................................................16
Item 4. Submission of Matters to a Vote of Security Holders.....................................16

PART II...................................................................................................17
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters....................17
Item 6. Selected Financial Data.................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................20
Item 7A. Quantitative and Qualitative Disclosure About Market Risk...............................27
Item 8. Financial Statements and Supplementary Data.............................................27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................................27

PART III..................................................................................................28
Item 10. Directors and Executive Officers of the Registrant......................................28
Item 11. Executive Compensation..................................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................28
Item 13. Certain Relationships and Related Transactions..........................................28

PART IV...................................................................................................42
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................42
</TABLE>

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The following text is qualified in its entirety by reference to the more
detailed information and consolidated financial statements (including the notes
thereto) appearing elsewhere in this Annual Report on Form 10-K (the "Annual
Report"). Unless otherwise indicated, (i) all current and prospective
information in this Annual Report gives effect to the Merger (as defined) and
related transactions completed on or before August 14, 1998, including the sale
of certain of Tatham Offshore's existing assets, the related retirement of
certain amounts of Tatham Offshore's Preferred Stock, the contribution to Tatham
Offshore of two semisubmersible drilling rigs, and the assumption of certain
debt, (ii) all references to "Tatham Offshore" or "Company" are to Tatham
Offshore, Inc. and its subsidiaries, and (iii) all financial information and per
share data in this Annual Report gives effect to the one for ten reverse stock
split Tatham Offshore completed on November 24, 1997.

Historically, Tatham Offshore has been in the oil and gas exploration and
development business, primarily in the Gulf of Mexico (the "Gulf"). The Company
has refocused its business from the oil and gas exploration and production
business in the Gulf to an integrated frontier investment strategy targeting
Atlantic Canada with an initial emphasis on the offshore contract drilling
business. Accordingly, in connection with DeepTech International Inc.'s
("DeepTech") merger with a subsidiary of El Paso Energy Corporation ("El Paso")
completed on August 14, 1998, Tatham Offshore (i) transferred its ownership of
Tatham Offshore Development, Inc. ("Tatham Development"), which owns oil and gas
producing properties, to DeepTech and its remaining oil and gas properties to
Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), a New York Stock
Exchange-listed master limited partnership in which DeepTech owned an effective
23.2% interest on August 14, 1998, and (ii) acquired from DeepTech ownership of
DeepFlex Production Services, Inc. ("DeepFlex") and therefore the FPS Laffit
Pincay (the "Laffit Pincay") and the FPS Bill Shoemaker (the "Bill Shoemaker"
and, together with the Laffit Pincay, the "Rigs"). RIGCO North America, L.L.C.
("RIGCO") and FPS VI, L.L.C. ("FPS VI"), wholly-owned subsidiaries of DeepFlex,
own all of the interests in the Laffit Pincay and the Bill Shoemaker. For a
description of certain items used herein relating to the oil and gas industry,
see Items 1 & 2. "Business and Properties -- Certain Definitions."

PART I

ITEMS 1 & 2. BUSINESS AND PROPERTIES

OVERVIEW

Tatham Offshore, a Delaware corporation founded in 1989, provides offshore
contract drilling services to the oil and gas industry in the Gulf and Atlantic
Canada and is currently pursuing an integrated energy related investment
strategy in Atlantic Canada. Through August 14, 1998, Tatham Offshore had been
engaged in the development, exploration and production of oil and gas reserves
located primarily in the Gulf focusing principally on the flextrend and
deepwater areas.

DEEPTECH MERGER AND RELATED TRANSACTIONS

On August 14, 1998, DeepTech merged with a subsidiary of El Paso (the
"Merger"). As a result of the Merger and related transactions, Tatham Offshore
and DeepTech were restructured by exchanging certain assets so that DeepFlex,
the indirect owner of two semisubmersible drilling rigs, became a wholly-owned
subsidiary of Tatham Offshore and Tatham Offshore transferred its interest in
the Sunday Silence prospect to DeepTech and transferred all of its remaining
assets located in the Gulf to Leviathan, an affiliate of DeepTech and formerly
an affiliate of Tatham Offshore. As such, all of the Company's oil and gas
operations in the Gulf are reflected as discontinued operations in the financial
statements. In connection with this reorganization, Tatham Offshore became
independent of DeepTech pursuant to a spin-off transaction effected by a Rights
Offering (the "Rights Offering") in which DeepTech offered and sold all of the
shares of Tatham Offshore common stock and Series A Preferred Stock held by
DeepTech to the stockholders of DeepTech.

On July 16, 1998, the Securities and Exchange Commission declared effective
Tatham Offshore's Registration Statement on Form S-1 relating to the offering of
rights to the DeepTech stockholders to purchase DeepTech's 28,073,450 shares of
Tatham Offshore common stock and 4,670,957 shares of Tatham Offshore's Series A
Preferred Stock in the Rights Offering. As a result of the Rights Offering,
unaffiliated parties purchased 3,378,693 shares of common stock and 562,148
shares of Series A Preferred Stock. Tatham Brothers Securities, LLC ("TB
Securities"), an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and
Chief Executive Officer of Tatham Offshore, purchased 20,768,011 shares of
common stock and 3,455,444 shares of Series A Preferred Stock which resulted in
DeepTech receiving net proceeds from the Rights Offering of $75.0 million. In
exchange for committing to purchase a specified portion of the stock underlying
any unexercised rights, TB Securities received a fee of $6.9 million. In
connection with the Rights Offering, Tatham Offshore purchased and cancelled all
of the shares of

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Common Stock and Series A Preferred Stock that were not acquired by the holders
of rights or TB Securities in the Rights Offering, 3,926,746 shares of Common
Stock and 653,365 shares of Series A Preferred Stock, respectively, and the
proceeds from such purchase by Tatham Offshore were contributed by DeepTech to
Tatham Offshore. DeepTech no longer owns any of Tatham Offshore's capital stock
as a result of the Rights Offering.

Following the restructuring, Tatham Offshore's marine services business
includes two semisubmersible drilling rigs, the Bill Shoemaker and the Laffit
Pincay, currently owned by wholly-owned subsidiaries of DeepFlex. In addition,
Tatham Offshore will continue to pursue energy related opportunities in Atlantic
Canada, including the North Atlantic pipeline project, related gas processing
facilities, a facility for the generation of electricity and other related
investments including upstream exploration and production activities and the
acquisition of oil and gas concessions or license interests.

RECENT EVENTS

Defaults Under Credit Facilities

In connection with the Merger, Tatham Offshore entered into a $22.9 million
short-term financing arrangement with Tatham Brothers, LLC ("Tatham Brothers")
(as amended, the "Short-Term Facility"). Proceeds from the Short-Term Facility
were used to refinance existing loans and provide funds necessary to satisfy
certain obligations of the Company in connection with the Merger and Rights
Offering. Pursuant to the terms of the Short-Term Facility, the Company was
required to pay $24.1 million in principal and $0.3 million in interest on April
30, 1999. Tatham Offshore did not make payment of such amounts; as a result, an
Event of Default has occurred and is continuing under the Short-Term Facility.
See "Note 7 -- Related Party Transactions -- Long-Term Debt to Affiliates" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for additional discussion of the
credit facilities of Tatham Offshore and its subsidiaries.

Bankruptcy Filing by Subsidiaries

Lawsuit Against Schlumberger Technology Corporation

On July 26, 1999, RIGCO filed a petition in the 165th Judicial District
Court in Harris County, Texas, alleging more than $51 million in actual damages
against Schlumberger Technology Corporation and Schlumberger Canada, Ltd.
(collectively, "Schlumberger") for claims arising out of Schlumberger's Sedco
Forex Division's marketing, manning, management and operation of the Bill
Shoemaker and Laffit Pincay pursuant to certain charter, make-ready and other
agreements and arrangements. The allegations include claims of gross negligence,
breach of contract, fraud, negligent misrepresentation and negligence. RIGCO is
seeking an unspecified amount of exemplary damages. RIGCO has alleged in
bankruptcy court proceedings that the manner in which Schlumberger performed its
duties with respect to the Bill Shoemaker and Laffit Pincay during the course of
the management and charter agreements resulted in RIGCO's financial difficulties
and caused it to default on its secured debt obligations.

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Nasdaq Delisting

The Company was notified by the Nasdaq Stock Market, Inc. that its common
stock did not meet certain minimum bid and public float requirements for
continued listing on the Nasdaq National Market. As a result, effective May 13,
1999, the Company's common stock was no longer listed on the Nasdaq National
Market and began trading on the over-the-counter bulletin board.

Release of Tax Letter of Credit

In August 1998, both El Paso Energy and the Company were required to post
letters of credit in connection with certain Merger related agreements. In March
1999, the Company entered into an agreement with El Paso Energy under which (i)
each company was released of its obligation to maintain letters of credit in
favor of one another, (ii) El Paso Energy paid the Company $618,000 and (iii)
the Company released its rights to certain potential pre-merger tax attributes
of the DeepTech group. As a result of this agreement, the Company's $6.1 million
cash collateral which secured its letter of credit in favor of El Paso Energy
was released and became available for general corporate purposes.

New Credit Facility

Effective July 1, 1999, Tatham Offshore entered into a revolving draw
facility with Tatham Investment Corp. which is 100% owned by Thomas P. Tatham.
The revolving draw facility provides for loans, at the lenders' sole
discretion, by Tatham Investment Corp. to the Company in amounts up to $5.0
million. The revolving draw facility bears interest at the rate of 15% per annum
and is payable upon demand by the lender. Through September 15, 1999, the
Company has borrowed $2.6 million under this facility. The Company has agreed
to pledge all of its equity ownership in certain wholly-owned subsidiaries of
the Company as well as a certain promissory note issued by Tatham Offshore
Canada, Limited.

CONTRACT DRILLING SERVICES

DESCRIPTION OF THE RIGS

Semisubmersible rigs are floating platforms that consist of an upper
working and living deck resting on vertical columns connected to lower hull
members. These rigs operate in a "semisubmerged" position, remaining afloat, off
bottom in a position in which the lower hull is from 55 to 90 feet below the
water line and the upper deck protrudes well above the surface. The Rigs are
positioned by chain mooring lines with anchors on the sea floor and remain
stable for drilling in the semisubmerged floating position due in part to their
wave transparency characteristics at the water line. The Rigs are able to change
draft through a water ballasting system that permits them to be submerged to a
predetermined depth so that a portion of the hulls are below the water surface
during drilling operations.

FPS Bill Shoemaker. The Bill Shoemaker is a self-propelled, twin pontoon,
eight column, second generation semisubmersible drilling rig of Aker H-3 design.
It can drill to depths of 25,000 feet, in water depths of up to 1,500 feet and
has a drilling variable load of approximately 3,850 short tons, a VARCO TDS-4S
top-drive drilling system, a 10,000 psi blow-out prevention system, 2,000 barrel
mud pits and eight 80,000 pound riser tensioners. This rig was built in 1976 and
was extensively refurbished, repaired, renovated and upgraded in 1997 at a cost
of approximately $56 million. The upgrades included installing a new heliport,
mud booster line, third mud pump, a third level of personnel accommodations and
a new electrical "SCR" system. In addition, the Bill Shoemaker underwent a
complete winterization program in this upgrade, and, as a result, is again able
to operate year-round in harsh environments, such as the North Sea, offshore
Newfoundland and eastern Canada, where it has operated in the past.

FPS Laffit Pincay. The Laffit Pincay is a second generation semisubmersible
drilling rig of Penrod/Reineke design. The Laffit Pincay is capable of drilling
to depths of 25,000 feet, in water depths of up to 1,200 feet and has a drilling
variable load of approximately 2,000 short tons, a 10,000 psi blow-out
prevention system, 1,600 barrel mud pits and six 80,000 pound riser tensioners.
This rig was built in 1976 and was refurbished, upgraded and renovated in 1996
at a cost of approximately $18 million with the installation of a VARCO TDS-3S
top-drive system and a new electrical "SCR" system.

RIG MANAGEMENT

Pursuant to management and charter agreements, Sedco Forex Division of
Schlumberger Technology Corporation ("Sedco Forex") has marketed, managed, and
operated the Rigs. On January 22, 1999, RIGCO gave Sedco Forex a written
termination notice of the management and charter agreements for the Laffit
Pincay. Effective March 23, 1999, RIGCO took over the marketing, management and
operational responsibilities for the Laffit Pincay. On April 20, 1999, RIGCO
gave Sedco Forex a written termination notice of the management and charter
agreement for the Bill Shoemaker. Under the Bill Shoemaker management and
charter agreement, Sedco Forex will continue to man and operate the rig through
the conclusion of its current drilling contract with Husky Oil Operations
Limited. At the conclusion of the current Husky Oil Operations Limited drilling
contract, RIGCO will assume the marketing, management and operational
responsibilities for the Bill Shoemaker. RIGCO is currently evaluating the

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possibility of entering into new management and charter arrangements or bareboat
charter agreements with other rig operators for the operations of either or both
of the Rigs.

CONTRACT FOR DRILLING EQUIPMENT

Most drilling contracts are structured on a dayrate, footage or turnkey
basis. They usually extend over a period covering either the drilling of a
single well, a group of wells (a "well-to-well contract") or a stated term (a
"term contract") and are terminable if the drilling unit is destroyed or lost,
drilling operations are suspended for a specified time because of a breakdown of
major equipment or other events occur which are beyond either party's control.
In many instances, the customer may extend the contract term upon exercising
options to drill additional wells at fixed or mutually agreed upon terms. Most
of the Company's drilling contracts are obtained through competitive bids or
negotiations with customers and their terms and conditions vary depending on the
specific facts and circumstances. To date, the Company has entered only into
dayrate contracts, although the Company may enter into non-dayrate contracts in
the future, depending on market conditions, profit potential and risk exposure,
among other things.

A dayrate drilling contract generally provides for a basic drilling rate
based on a fixed rate per day. Under such a contract, the customer usually bears
a major portion of out-of-pocket costs of drilling and assumes most of the risk
associated with drilling operations such as risk of blowout, loss of hole, stuck
drill stem, machinery breakdowns, abnormal drilling conditions and risks
associated with subcontractors' services, supplies and personnel. In contrast,
the risks to the contractor on non-dayrate contracts could be substantially
greater than on a dayrate drilling contract because the contractor may, and
often does, assume more of those risks associated with drilling operations
generally assumed by the operator in a dayrate contract.

The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategy of the offshore drilling
contractor and its customers. During periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts since such contracts provide
them the flexibility to profit from increasing dayrates. In contrast, during
such periods, customers with reasonably definite drilling programs typically
prefer longer-term contracts to maintain prices at the lowest level possible.

As an alternative to entering into drilling contracts, the Company may
bareboat charter one or both of the Rigs. Under a bareboat charter, the
Company would receive a fixed dollar amount per day for the use of the rig
by another offshore drilling contractor. The Company would receive the fixed
dollar amount whether or not the drilling contractor actually utilizes the
rig. Under a bareboat charter arrangement, the Company would generally receive
a lower per day rate but would eliminate the risk and expense associated
with having idle equipment.

FPS Bill Shoemaker. After completion of the upgrade and refurbishment in
July 1997, the Bill Shoemaker was mobilized to the Grand Banks area offshore
Newfoundland where it completed drilling an exploratory well for Amoco Canada
Petroleum Company Ltd. in the West Bonne Bay Field. Amoco Canada exercised
an option to drill a second well under this agreement but failed to actually
drill such well. To date, the Company has not received any compensation relating
to the Amoco Canada option well. Following the completion of the Amoco Canada
well, the Bill Shoemaker returned to the Gulf of Mexico and effective January
25, 1998 was under contract to Shell Offshore Inc. ("Shell") for a one-year
period. The Company was notified by Sedco Forex that as of November 18, 1998
Shell would cease using the Bill Shoemaker to conduct drilling operations in the
Gulf. The Company has been paid for drilling services performed by the Bill
Shoemaker for Shell through November 18, 1998 but has not been paid for any
period since that time.

After the early termination of the Shell contract, the Bill Shoemaker
underwent upgrades and refurbishments in a shipyard in Galveston, Texas prior to
returning to the Grand Banks area offshore Newfoundland. From March through
September 1999, the Bill Shoemaker drilled three wells for Husky Oil Operations,
Ltd. on their Whiterose project, offshore Newfoundland. On April 20, 1999, RIGCO
gave Sedco Forex a written termination notice of the management and charter
agreement for the Bill Shoemaker. The termination of the management and charter
agreement will be effective following the end of the Husky contract. During the
year ended June 30, 1999, the Bill Shoemaker generated $37.6 million in revenue.

FPS Laffit Pincay. Following the completion of a refurbishment and upgrade
program in February 1996, the Laffit Pincay was placed under contract with
Leviathan to complete a previously drilled well and drill a new well in Garden
Banks Block 117. Following the completion of the well for Leviathan, the Laffit
Pincay was committed to Phillips Petroleum Company to drill one well at Garden
Banks Block 70 in the Gulf with options to drill and/or complete three
additional wells at various Gulf locations. This contract was completed in late
September 1997 after Phillips drilled one of its "option" wells. Pennzoil
Exploration and Production Company entered into an agreement to drill two wells
following the completion of the two Phillips wells. Pennzoil drilled one of its
wells with the Laffit Pincay but failed to drill the second contract well.
To date, the Company has not received any compensation for the second Pennzoil
well. Following the early release of the Laffit Pincay from Pennzoil, the rig
was taken out of service for approximately six weeks to complete scheduled
maintenance and certain upgrades. From April 23, 1998 through July 18, 1998, the
Laffit Pincay was not under contract due to the softening of market conditions
for similar

<PAGE> 7

rigs in the Gulf. From July 19, 1998 through August 11, 1998, the Laffit Pincay
was under contract with Ocean Energy, Inc. to conduct a one well program. From
August 12, 1998 to the present date, the Laffit Pincay has not been under
contract.

On March 23, 1999, RIGCO assumed the management and operational
responsibility for the Laffit Pincay. The Laffit Pincay is currently stacked in
a shipyard in Pascagoula, Mississippi. The Company is in the process of
completing engineering studies and obtaining cost estimates to upgrade the rig
to enable it to drill in a dynamic position mode in water depths of up to 5,000
feet. The Company believes that the Laffit Pincay, upgraded for dynamic
positioned drilling, would make an ideal candidate for drilling opportunities
offshore Brazil and West Africa. Although the engineering studies and cost
estimates are not complete, preliminary estimates indicate that the upgrades
will cost approximately $90-$100 million and could be completed within a twelve
month period. The Company is currently attempting to market the Laffit Pincay to
obtain a long-term drilling contract to support the capital requirements for the
upgrade; however, no assurances can be made regarding when or if any such
contract could be obtained. In addition, the Company continues to market the
Laffit Pincay for drilling services in the Gulf and FPS opportunities in Brazil
and the Grand Banks area offshore Newfoundland. During the year ended June 30,
1999, the Laffit Pincay generated $2.2 million in revenue. However, no assurance
can be made as to when and for what term the Laffit Pincay will be under
contract in the future. See "-- Competition" and " -- Industry Conditions."

CUSTOMERS

The Company provides offshore drilling services to a market that is
comprised of major and independent oil and gas companies. The Company does not
have as many customers as its competitors primarily due to the Company's limited
number of rigs and operating history and the manner in which it has
traditionally marketed its rigs through charter agreements with Sedco Forex.
Historically, the Rigs were deployed to several companies as discussed above,
through contracts with Sedco Forex. Prospectively, the Company intends to enter
into one or more agreements with other rig operators to either bareboat charter
the Rigs or to man and operate the Rigs, including assisting the Company in
attracting new customers for the Rigs. The Company will also attempt to market
the Rigs directly to potential customers, although it is difficult to assess the
potential outcome of such efforts.

COMPETITION

The contract drilling industry is an intensely competitive industry where
no one company is dominant. The Company's ability to continue to generate
business is dependent primarily on the level of domestic oil and gas exploration
and development activity and, in part on its ability to adapt to new technology
and drilling techniques as they become available. The Company competes with
numerous other drilling contractors, some of whom are substantially larger than
the Company and possess appreciably greater financial and other resources.

During the last three years, there have been several business
consolidations that have reduced the drilling industry's fragmented nature.
Although this has decreased the total number of competitors, the Company
believes that competition for drilling contracts will remain intense in the
foreseeable future. Companies generally compete on the basis of price, workforce
experience, equipment suitability and availability, reputation, expertise,
technology and financial capability. While competition is primarily on a
regional basis, rigs can be moved from one region to another, as well as between
water depths, in response to changes in levels of drilling activity, subject to
crew availability and mobilization expenses.

Moreover, the prospects for the offshore contract drilling industry as a
whole during 1997 and early 1998 led to increased rig activation, enhancement
and construction programs by the Company's competitors. Furthermore, the Company
understands that there are currently several new rigs under construction at
various shipyards worldwide. A significant increase in the supply of
technologically-advanced rigs capable of drilling in deepwater, including
drillships, may have an adverse effect on the average operating rates and
utilization levels for the Rigs.

INDUSTRY CONDITIONS

The demand for offshore drilling services, and thus the Company's revenues
and earnings, are directly affected by the worldwide level of oil and gas
exploration and development activity. From the mid-1980s through the early
1990s, demand for offshore drilling rigs was declining or flat, and the industry
fleet of offshore drilling rigs was reduced. In recent years, demand for
offshore rigs has improved, but the supply of rigs is only now beginning to

<PAGE> 8
increase. The industry has emphasized upgrading and refurbishing existing rigs,
due to the high capital costs and long lead times associated with new
construction. In the last two years, however, several competitors have begun
construction of new-build deepwater drillships and semisubmersible rigs in
response to increased demand for rigs with deepwater capabilities. The new-build
rigs and refurbished rigs are beginning to become available in the marketplace
which increases competition for an already reduced level of drilling contracts.

Technological advances such as extended reach drilling, multilateral
drilling techniques and new offshore development and production applications
have reduced the costs of developing oil and gas fields. As a result, previously
uneconomic discoveries, particularly in deeper water, have become viable, and
the industry has placed increasing emphasis on exploiting existing resources
using new applications. The development of three-dimensional seismic surveys has
reduced exploration risks, thus placing increased emphasis on selective
exploratory drilling. However, oil prices declined substantially during 1998,
which caused drilling budgets for 1999 to decline. Although temporary downturns
in oil prices do not generally have an impact on the demand for deepwater
drilling rigs, such declines have caused dayrates to decline. In addition to the
Laffit Pincay, there are several similarly equipped semisubmersibles currently
deployed in the Gulf that do not have current drilling contracts or commitments.
By mid-1999, oil and natural gas prices increased to pre-1998 levels which
should result in increased drilling budgets for the year 2000.

DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent on the services and expertise provided to
it by the Company's Chairman of the Board and Chief Executive Officer, Mr.
Thomas P. Tatham, the loss of which could substantially impair the Company's
operations. The Company has not entered into an employment contract with Mr.
Tatham, nor has it obtained "key man" life insurance on his life. Mr. Tatham
has not received any salary or other compensation since August 14, 1998.

YEAR 2000

While the Company believes that all of its software and equipment is year
2000 compliant, it is substantially dependent on vendor compliance. In addition
to its own computer systems, in connection with its business activities, the
Company interacts with suppliers, customers, creditors and financial service
organizations which use computer systems. Although the Company intends to
interact only with those third parties that have year 2000 compliant computer
systems, it is impossible for the Company to monitor all such systems. There can
be no assurances that such third party systems are year 2000 compliant. If not,
such lack of compliance may have an adverse material impact on the Company's
business and operations. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Year 2000."

MAINTENANCE

The Rigs require continuous and significant maintenance to remain
operational, competitive and economically efficient. In addition to daily
repairs and maintenance and planned monthly or annual maintenance, which may
constitute as much as 15% to 20% of the aggregate operating expenditures of a
properly maintained rig, semisubmersible rigs require periodic major
maintenance, reworking and refurbishment, and replacement of major drilling
equipment, power generation equipment, mooring systems and drill pipe. Because
such major maintenance results in significant expenditures as well as the loss
of revenue associated with the required downtime, it usually is scheduled over a
rolling five year period and coordinated with other necessary operations and,
where possible, business cycles. Both Rigs have recently completed a total
maintenance and refurbishment program, including recent repairs and certain
upgrades to both the Laffit Pincay and the Bill Shoemaker.
See "-- Description of Rigs."

Notwithstanding the age of its Rigs, the Company believes that it will be
feasible to continue to upgrade them. However, there can be no assurance as to
if, when or to what extent upgrades will continue to be made to such Rigs. If
such upgrades are undertaken, there can be no assurance that the upgrades can be
completed in a cost-effective manner or that there will be adequate demand for
the Rigs' services.

ATLANTIC CANADA STRATEGY

As its principal focus, the Company intends to pursue an integrated
investment strategy in Atlantic Canada by leveraging initially on the
availability and utilization of the Rigs. The Company believes that the
Atlantic

<PAGE> 9
Canada region offers significant investment opportunities. The Company's plans
include utilizing the Bill Shoemaker, its cold weather, hostile environment
drilling rig, as well as diversifying its business to include substantial
natural gas gathering and transmission facilities, fixed location gravity based
platforms, related gas processing facilities, a facility for the generation of
electricity and other related investments including upstream exploration and
production activities and the acquisition of oil and gas concessions or license
interests. In Atlantic Canada, as with any frontier region, there will be
substantial risks associated with investments in such projects. However, the
Company believes that by using an integrated investment approach related to the
development of the region's hydrocarbon reserves, the potential for investment
returns is maximized. The Company is contemplating pursuing the development of
the projects described below. Each of these projects is in a preliminary,
conceptual phase. In addition, (i) the Company does not currently possess the
capital necessary to implement its business strategy completely and there can be
no assurances that the Company will be able to obtain sufficient capital for any
or all of the projects, (ii) there can be no assurances that these projects and
other opportunities will prove to be economic or that they will occur, and (iii)
many of these projects will require governmental approvals, almost all of which
the Company has yet to receive. Moreover, if there are developments that the
Company determines to be indicative of a lack of reasonable opportunity to
realize benefits for the Company's stockholders, then the Company will pursue
other opportunities, wherever located.

Pipeline Activities. During 1997, Tatham Offshore Canada Limited, a
wholly-owned subsidiary of the Company, was formed to pursue business
opportunities in the Atlantic Canada region. In addition, the Company has caused
to be formed two limited partnerships, one in Canada and one in the United
States and both known collectively as North Atlantic Pipeline Partners to
construct and operate an offshore natural gas or multi-phase pipeline from
the Grand Banks area offshore Newfoundland to the east coast of the United
States with land falls in both Newfoundland and Nova Scotia.

Since another pipeline company was given regulatory authority to construct
a pipeline from the offshore Nova Scotia area, North Atlantic Pipeline Partners
has refocused its efforts to concentrate on the first phase of the pipeline. As
redesigned, the initial phase of the pipeline project would be approximately 615
kilometers long and would originate in the Jeanne D'Arc Basin of the Grand Banks
area and extend to a point near Come-by-Chance, Newfoundland and would include
the construction of a gravity based structure ("GBS") on the Grand Banks.

In conjunction with its application to the NEB in 1997, North Atlantic
Pipeline Partners obtained nonbinding letters of intent for the use of its
system to deliver gas to the United States which total approximately 500 MMcf
per day. The Company believes that there is significant reserve potential from
the areas offshore Atlantic Canada and as that reserve potential is developed, a
second pipeline into the United States will be required to meet increased demand
for natural gas on the east coast of the United States. The timing of increased
drilling activity and the development of the Atlantic Canada reserve potential
is dependent upon major and independent producers. As development drilling in
the area continues, the Company will be better able to assess the timing and
construction requirements for a second pipeline into the United States.

Gas Processing Facility. The natural gas that will be produced in the Grand
Banks area and potentially be transported through North Atlantic Pipeline
Partners' pipeline system is expected to contain significant quantities of
natural gas liquids ("NGLs"), such as ethane, propane, butanes and natural
gasoline. These NGLs can be recovered from the natural gas stream through
processing. The Company is investigating the possibility of developing a gas
processing plant to use the natural gas from the Grand Banks area. The Company
estimates that a processing plant to process the natural gas would cost
approximately $110 million and would be able to initially process up to 400 MMcf
of gas per day, with the ability to be upgraded to process additional natural
gas at a cost of approximately $75 million for each additional 400 MMcf per day.
In addition, the Company is evaluating opportunities to maximize economic value
from potential processing operations with petrochemical producers and with other
potential users of NGLs. The successful development of any such processing
project would be dependent on the construction of the pipeline system proposed
by the North Atlantic Pipeline Partners. The Company currently does not possess
the capital necessary to construct a gas processing plant and there can be no
assurances that the Company will be able to raise sufficient capital resources
at attractive rates to construct such a facility.

Power Generation Facility. To develop a market for the Grand Banks area
natural gas, in addition to a gas processing plant, the Company has examined the
feasibility of building a gas fired power generating plant at a cost of
approximately $260 million for 600 megawatts of combined cycle power generation.
Electrical generation in Newfoundland is currently not gas fired, relying
instead, in large part, on less efficient,

<PAGE> 10

transported fuel oil. The successful development of any such power generation
project would be dependent on the construction of the pipeline system and gas
processing facility discussed above.

Hydrocarbon Marketing Company. As part of its activities in the region, the
Company has formed North Atlantic Hydrocarbons Marketing, Inc. ("North Atlantic
Marketing") to buy natural gas and NGLs contained in the natural gas stream in
the production. North Atlantic Marketing would assume the marketing risk related
to the natural gas stream, purchasing the natural gas and entrained liquids, and
in some cases oil, from producers and finding a market for those hydrocarbons.

Oil and Gas Development. Significant oil and gas exploration and production
opportunities also exist throughout the region. The Company is actively seeking
to acquire working interests for proven and probable reserves in Atlantic Canada
and has had independent studies undertaken of the prospective reserves in the
region. Those studies indicate that the region is one of the largest potential
gas regions in North America. Unlike other international opportunities, the
Company does not consider political instability as a significant risk factor
with respect to Canadian opportunities.

On September 18, 1998, Tatham Offshore Canada was informed by the
Canada-Newfoundland Offshore Petroleum Board that it was the successful bidder
on an exploration license offshore Newfoundland. The exploration license is
located on the Grand Banks and contains approximately 176,000 acres. The Company
has agreed to spend approximately CN $1,000,000 in the five years following the
grant of the license in qualified exploration expenditures in the defined area.
The Company may participate as a bidder in upcoming licensing rounds offshore
Newfoundland.

Other Opportunities. Among other potential businesses the Company may
enter, the Company is currently evaluating the feasibility of (i) an industrial
gas distribution system, (ii) an ice management system designed to manage and
reduce the risk of potential damage to its proposed offshore pipelines and
subsea facilities owned by other parties, operated through the Company's
subsidiary, Berg Masters Limited, (iii) a large diameter steel pipe rolling
mill, (iv) methanol production, and (v) other opportunities related to or
located in Atlantic Canada. There can be no assurances that such opportunities
will prove economic, be financeable or will occur.

OIL AND GAS PROPERTIES

GENERAL

As of June 30, 1998, Tatham Offshore owned interests in oil and gas leases
in the Gulf covering approximately 31,809 gross (22,598 net) acres. See " --Oil
and Gas Reserves" for an estimate of Tatham Offshore's total proved developed
reserves of oil and gas and a discussion of the assumptions used in, and
inherent difficulties relating to, estimating reserves. However, all of these
leases were under contract to be transferred, and were transferred, in
transactions which closed on or before August 14, 1998.

DESCRIPTION OF SIGNIFICANT PROPERTIES

The following is a description of the significant properties that Tatham
Offshore held until August 14, 1998, the date the Merger and related
transactions were completed. See " -- DeepTech Merger and Related Transactions".

Viosca Knoll Block 817. Viosca Knoll Block 817 is a producing property that
is comprised of 5,760 gross (1,440 net) acres located 40 miles off the coast of
Louisiana in approximately 650 feet of water. Tatham Offshore owned a 25%
working interest (the "Subject Interest") in the Viosca Knoll Block 817 acreage,
which interest is burdened by a convertible production payment described below.
See "-- Reversionary Interests." From the inception of production in December
1995 through June 30, 1998, the Viosca Knoll Block 817 project has produced 12.4
Bcf of gas and 22,527 barrels of oil, net to Tatham Offshore's 25% working
interest. Gas production from Viosca Knoll Block 817 is dedicated to Leviathan
for gathering through the Viosca Knoll system.

Under the convertible production payment, the holders are entitled in the
aggregate to 25% of the proceeds from the production attributable to the Subject
Interest (after deducting all leasehold operating expenses, including platform
access and processing fees) until the holders have received the aggregate sum of
$16.0 million. At the option of the holders, the unpaid portion of the
production payment may be converted into Tatham Offshore common stock at any
time until September 2000. In March 1998, Mr. Tatham acquired one-half of this
convertible production payment. At June 30, 1998, the unpaid portion of the
convertible production payment obligation totaled $11.3 million.

<PAGE> 11

West Delta Block 35. West Delta Block 35, a producing field located 10
miles off the coast of Louisiana in approximately 60 feet of water, was acquired
by Tatham Offshore in 1992 to drill for and produce remaining reserves in a
fault block of an abandoned field. In late 1992, Tatham Offshore farmed-out the
property and retained a 38% working interest in West Delta Block 35. The West
Delta Block 35 field commenced production in July 1993. From the inception of
production through June 30, 1998, the West Delta 35 field has produced 3.5 Bcf
of gas and 36,873 barrels of oil, net to Tatham Offshore's interest.

Ewing Bank Blocks 958, 959, 1002 and 1003. Tatham Development owns a 100%
working interest in Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday
Silence Project, an undeveloped field that is comprised of 20,160 gross acres
located approximately six miles south of Ewing Bank Blocks 914 and 915
(discussed below) in water depths ranging from 1,400 to 1,600 feet. In July
1994, Tatham Offshore completed the drilling of an exploratory well, the Ewing
Bank 958 #1. The Ewing Bank 958 #1 well, which was drilled to a total measured
depth of 17,600 feet, identified pay zones in the Pliocene aged formations lying
primarily at measured depths between 10,000 and 15,000 feet. Tatham Offshore
completed drilling a second well at Ewing Bank Block 1003 in September 1994 to
delineate the field. During October 1994, the Ewing Bank 1003 #1 delineation
well was flow-tested at a rate of approximately 8,700 barrels of oil and 5.4
MMcf of gas per day.

In June 1997, the United States Department of the Interior, Minerals
Management Service notified Tatham Offshore that its application for deepwater
royalty relief for the Sunday Silence Project had been approved under a federal
law enacted in November 1995. The royalty relief provides for the abatement of
federal royalty on the first 52.5 million barrels of oil equivalent produced
from the Sunday Silence Project.

In connection with the Merger and related transactions, Tatham Offshore
conveyed to DeepTech all of its outstanding shares of capital stock of Tatham
Development as discussed in " -- DeepTech Merger and Related Transactions".

Ewing Bank Blocks 914 and 915. Tatham Offshore owned a 100% working
interest in each of Ewing Bank Blocks 914 and 915, which are both located in a
water depth of approximately 1,000 feet. From the inception of production
through June 30, 1998, the Ewing Bank 914 #2 well produced a total of 1.2
million barrels of oil and condensate and 3.4 Bcf of gas. In May 1997, the Ewing
Bank 914 #2 well was shut-in as a result of a downhole mechanical problem and in
May 1998, Tatham Offshore completed abandonment procedures on the Ewing Bank 914
#2 and the Ewing Bank 915 #4 wells.

Ship Shoal Block 331. Ship Shoal Block 331 is located 75 miles off the
coast of Louisiana in approximately 370 feet of water. Tatham Offshore held a
100% working interest in the 5,278 gross acres lease. In December 1997, Tatham
Offshore assigned its interests and related abandonment obligations in Ship
Shoal Block 331 to a third party. Prior to the production problems, the Ship
Shoal Block 331 project produced 88 MMcf of gas and 41,875 barrels of oil.

Reversionary Interests. Tatham Offshore canceled its reversionary working
interests of 37.5% in Viosca Knoll Block 817, 25% in Garden Banks Block 72 and
25% in Garden Banks Block 117 in connection with the Merger and related
transactions discussed in " -- DeepTech Merger and Related Transactions".

Ship Shoal Block 331 Platform. Tatham Offshore owned 100% of a multipurpose
platform located in Ship Shoal Block 331. The Ship Shoal 331 Platform is located
adjacent to Leviathan's platform at Ship Shoal Block 332 which serves as the
junction platform connecting two pipeline systems in which Leviathan owns an
approximate 25.7% interest. The Ship Shoal 331 Platform was conveyed to
Leviathan in connection with the Merger and related transactions discussed in
"-- DeepTech Merger and Related Transactions."

CUSTOMERS AND CONTRACTS

Ewing Bank Gathering Agreement. In 1992, Leviathan, DeepTech and Tatham
Offshore entered into the Ewing Bank Gathering Agreement (the "Ewing Bank
Agreement"). Pursuant to the Ewing Bank Agreement and the Master Gas Dedication
Agreement (as discussed below), all existing and future oil and gas production
from Tatham Offshore's leaseholds in the Ewing Bank project area was dedicated
to Leviathan for transportation.

<PAGE> 12

Master Gas Dedication Agreement. In December 1993, Leviathan and Tatham
Offshore entered into the Master Gas Dedication Agreement pursuant to which
Tatham Offshore dedicated to Leviathan transportation of all future production,
if any, from Tatham Offshore's Viosca Knoll Block 817, Garden Banks Block 72,
Garden Banks Block 117 and Ship Shoal Block 331 project areas and, in certain
cases, additional acreage contained in adjoining areas of mutual interest. In
exchange, Leviathan agreed to install certain pipeline facilities necessary to
transport production from these areas and to provide transportation services
with respect to such production.

Marketing Agreements. Tatham Offshore and Offshore Gas Marketing, Inc.
("Offshore Marketing"), a subsidiary of DeepTech, entered into agreements
whereby Offshore Marketing agreed to purchase all of the gas, oil and condensate
produced by Tatham Offshore. The agreement provides Offshore Marketing fees
equal to 2% of the sales value of crude oil and condensate and $0.015 per
dekatherm of natural gas for selling Tatham Offshore's production. During the
year ended June 30, 1998, Tatham Offshore's sales to Offshore Marketing totaled
$10.8 million. During the year ended June 30, 1999, Tatham Offshore's sales to
Offshore Marketing totaled $0.9 million.

All of the foregoing agreements were either terminated or assigned to
DeepTech or Leviathan in connection with the Merger and related transactions.

OIL AND GAS RESERVES

Estimates of Tatham Offshore's oil and gas reserves as of June 30, 1998
have been made by the Company's reserve engineers. As of June 30, 1998, the
Company estimated that the aggregate of Tatham Offshore's proved developed
reserves totaled 62,300 barrels of oil and 7,684 MMcf of gas. Estimated proved
reserves totaled 41,900 barrels of oil and 5,989 MMcf of gas for Viosca Knoll
Block 817 and 20,400 barrels of oil and 1,695 MMcf of gas for West Delta Block
35.

In general, estimates of economically recoverable oil and natural gas
reserves and of the future net revenue therefrom are based upon a number of
variable factors and assumptions, such as historical production from the subject
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs and
future plugging and abandonment costs, all of which may vary considerably from
actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenue expected therefrom, prepared by different
engineers or by the same engineers at different sites, may vary substantially.
The meaningfulness of such estimates is highly dependent upon the assumptions
upon which they are based.

Estimates with respect to proved reserves that may be developed and
produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than upon actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves. A significant portion of Tatham Offshore's reserves is based
upon volumetric calculations.

The estimated future net cash flows and the present value of estimated
future net cash flows discounted at 10% per annum, from the production and sale
of the proved developed reserves attributable to the Company's interest in oil
and gas properties as of June 30, 1998, as determined by the Company's reserve
engineers in accordance with the requirements of applicable accounting standards
before income taxes totaled $3.5 million and $3.4 million, respectively. In
preparing such estimates, the Company used prices of $12.28 per barrel of oil
and $1.76 per Mcf of gas as of June 30,1998. All of Tatham Offshore's reserves
at June 30, 1998 were classified as proved developed reserves.

In accordance with applicable requirements of the Securities and Exchange
Commission (the "Commission"), the estimated discounted future net revenue from
estimated proved reserves are based on prices and costs at fiscal year end
unless future prices or costs are contractually determined at such date. Actual
future prices and costs may be materially higher or lower. Actual future net
revenue also will be affected by factors such as actual production, supply and
demand for oil and gas, curtailments or increases in consumption by natural gas
purchasers, changes in governmental regulations or taxation and the impact of
inflation on costs.

<PAGE> 13

In accordance with the methodology approved by the Commission, specific
assumptions were applied in the computation of the reserve evaluation estimates.
Under this methodology, future net cash flows are determined by reducing
estimated future gross cash flows to Tatham Offshore for oil and natural gas
sales by the estimated costs to develop and produce the underlying reserves,
including future capital expenditures, operating costs, transportation costs,
royalty and overriding royalty burdens, production payments and net profits
interest expense on certain of Tatham Offshore's properties.

Future net cash flows were discounted at 10% per annum to arrive at
discounted future net cash flows. The 10% discount factor used to calculate
present value is required by the Commission, but such rate is not necessarily
the most appropriate discount rate. Present value of future net cash flows,
irrespective of the discount rate used, is materially affected by assumptions of
future oil and natural gas prices and timing of production, which may prove to
be inaccurate. In addition, the calculations of estimated net revenue do not
take into account the effect of certain cash outlays, including, among other
things, general and administrative costs, interest expense and dividends. The
present value of future net cash flows shown above should not be construed as
the current market value as of June 30, 1998, or any prior date, of the
estimated oil and natural gas reserves attributable to Tatham Offshore's
properties.

PRODUCTION, UNIT PRICES AND COSTS

The following table sets forth certain information regarding the production
volumes of, average unit prices received for and average production costs for
Tatham Offshore's sale of oil and gas for the periods indicated:

Natural Gas (MMcf) Oil and Condensate (Mbbl)
Year Ended June 30, Year Ended June 30,
------------------- -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net production................ 4,532 7,180 16 170
Average sales price........... $ 2.34 $ 2.36 $16.24 $22.35
Average production costs (1).. $ 1.13 $ 1.03 $ 6.79 $ 6.19
</TABLE>

--------------

(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include demand and commodity charges under transportation
agreements, platform access and processing fees, maintenance and
repair, labor and utilities costs.

The relationship between Tatham Offshore's average prices and its average
production costs depicted by the table above is not necessarily indicative of
future results of operations expected by Tatham Offshore.

ACREAGE

Undeveloped acreage is considered to be those lease acres on which wells
have not been drilled or completed to a point that would permit the production
of commercial quantities of oil and gas, regardless of whether or not such
acreage contains proved reserves. All of Tatham Offshore's acreage is
undeveloped. Gross acres refer to the combined number of acres in which a
working interest is owned directly by Tatham Offshore. The number of net acres
is the sum of the fractional ownership of working interests owned directly by
Tatham Offshore in the gross acres. At June 30, 1999, Tatham Offshore had a 100%
working interest in Exploratory License EL No. 1042 consisting of 71,251
hectares (approximately 176,000 acres) offshore Newfoundland, Canada.

OIL AND GAS DRILLING ACTIVITY

During the year ended June 30, 1997, Tatham Offshore drilled four gross and
one net natural gas development wells. The Company did not have any oil and gas
drilling activity for the years ended June 30, 1998 and 1999. As of June 30,
1999, the Company did not have an interest in producing oil or gas wells.

REGULATION

The oil and gas industry is extensively regulated by federal, state and
provincial authorities in the United States and Canada. Further, numerous
departments and agencies, both federal and state, have issued rules and
regulations binding on the oil and gas industry and its individual members, some
of which carry substantial penalties for the

<PAGE> 14

failure to comply. Legislation affecting the oil and gas industry is under
constant review and statutes are constantly being adopted, expanded or amended.
This regulatory burden increases the oil and gas industry's cost of doing
business.

In particular, the drilling industry is dependent on the demand for
services from the oil and gas exploration industry and, accordingly, is affected
by changing tax laws, price controls and other laws relating to the energy
business. The Company's business is affected generally by political developments
and by federal, state, provincial, local and foreign laws, rules and regulations
which may relate directly to the oil and gas industry. The adoption of laws,
rules and regulations, both domestic and foreign, which curtail exploration and
development drilling for oil and gas for economic, environmental or other policy
reasons may adversely affect the Company's operations by limiting available
drilling and production opportunities. The Company's foreign operations are
subject to political, economic, environmental and other uncertainties associated
with foreign operations, as well as the additional risks of fluctuating currency
values and exchange controls. Governments may from time to time suspend or
curtail drilling operations or leasing activities when such operations are
considered to be detrimental to the environment or to jeopardize public safety.

ENVIRONMENTAL

General. The Company's operations are subject to extensive federal, state
and local statutory and regulatory requirements relating to environmental
affairs, health and safety, waste management and chemical products. In recent
years, these requirements have become increasingly stringent and in certain
circumstances, they impose "strict liability" on a company, rendering it liable
for environmental damage without regard to negligence or fault on the part of
such company. To the Company's knowledge, its operations are in substantial
compliance, and are expected to continue to comply in all material respects,
with applicable environmental laws, regulations and ordinances.

It is possible, however, that future developments, such as stricter
environmental laws, regulations or enforcement policies could affect the
handling, manufacture, use, emission or disposal of substances or wastes by the
Company. In addition, some risk of environmental costs and liabilities is
inherent in the Company's operations and products as it is with other companies
engaged in similar or related businesses, and there can be no assurance that
material costs and liabilities, including substantial fines and criminal
sanctions for violation of environmental laws and regulations, will not be
incurred by the Company. Furthermore, the Company will likely be required to
increase its expenditures during the next several years to comply with higher
industry and regulatory safety standards. However, such expenditures cannot be
accurately estimated at this time.

Solid Waste. The Company's operations may generate or transport both
hazardous and nonhazardous solid wastes that are subject to the requirements of
the federal Resource Conservation and Recovery Act ("RCRA"), as amended, 42
U.S.C. Section 6901 et. seq., and its regulations, and comparable state statutes
and regulations. Further, it is possible that some wastes that are currently
classified as nonhazardous, via exemption or otherwise, perhaps including wastes
currently generated during exploration, development and production operations
may, in the future be designated as "hazardous wastes," which are subject to
more rigorous and costly treatment, storage, transportation and disposal
requirements. Such changes in the regulations may result in additional
expenditures or operating expenses by the Company. As recently as August 8,
1998, the Environmental Protection Agency ("EPA") added four petroleum refining
wastes to the list of RCRA hazardous wastes. While the full impact of the rule
has yet to be determined, the rule may, as of February 1999, impose increased
expenditures and operating expenses on the Company, which may take on increased
obligations relating to the treatment, storage, transportation and disposal of
certain petroleum refining wastes that previously were not regulated as
hazardous wastes.

Hazardous Substances. The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et. seq., and
comparable state statutes, also known as "Superfund" laws, impose liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons that cause or contribute to the release or threatened release
of a "hazardous substance" into the environment. These persons include the
current owner or operator of a site, the past owner or operator of a site, and
companies that transport, dispose of or arrange for the disposal of the
hazardous substances found at the site. CERCLA also authorizes the EPA or state
agency and, in some cases third parties, to take actions in response to threats
to the public health or the environment and to seek to recover from the
responsible classes of persons the costs they incur. Despite the "petroleum
exclusion" of Section 101(14) that currently encompasses natural gas, the
Company may nonetheless generate or transport "hazardous substances" within the
meaning of CERCLA, or comparable state statutes, in the course of its ordinary

<PAGE> 15

operations. In addition, certain petroleum refining wastes that previously were
not regulated as hazardous wastes may now fall within the definition of CERCLA
hazardous substance. Thus, the Company may be responsible under CERCLA or the
state equivalents for all or part of the costs required to clean up sites where
a release of a hazardous substance has occurred.

Air. Tatham Offshore's operations may be subject to the Clean Air Act
("CAA"), 42 U.S.C. Section 7401-7642, et. seq., and comparable state statutes.
The 1990 CAA amendments and accompanying regulations, state or federal, may
impose certain pollution control requirements with respect to air emissions from
operations, particularly in instances where a company constructs a new facility
or modifies an existing facility. The Company may also be required to incur
certain capital expenditures in the next several years for air pollution control
equipment in connection with maintaining or obtaining operating permits and
approvals addressing other air emission-related issues. However, the Company
does not believe its operations will be materially adversely affected by any
such requirements.

Water. The Federal Water Pollution Control Act ("FWPCA"), or Clean Water
Act, 33 U.S.C. Section 1311 et. seq., imposes strict controls against the
unauthorized discharge of produced waters and other oil and gas wastes into
navigable waters. The FWPCA provides for civil and criminal penalties for any
unauthorized discharges of oil and other hazardous substances in reportable
quantities and, along with the Oil Pollution Act of 1990 ("OPA"), 33 U.S.C.
Sections 2701-2761, imposes substantial potential liability for the costs of
removal, remediation and damages. Similarly, the OPA imposes liability for the
discharge of oil into or upon navigable waters or adjoining shorelines. Among
other things, the OPA raises liability limits, narrows defenses to liability and
provides more instances in which a responsible party is subject to unlimited
liability. One provision of the OPA requires that offshore facilities establish
and maintain evidence of financial responsibility of $150 million. State laws
for the control of water pollution also provide varying civil and criminal
penalties and liabilities in the case of an unauthorized discharge of petroleum,
its derivatives or other hazardous substances into state waters. Further, the
Coastal Zone Management Act ("CZMA"), 16 U.S.C. Sections 1451-1464,
authorizes state implementation and development of programs containing
management measures for the control of nonpoint source pollution to restore and
protect coastal waters. State and federal wetlands presentation programs may
also impose certain restrictions on dredge and fill and development activities.

Endangered Species. The Endangered Species Act ("ESA"), 7 U.S.C. Section
136, seeks to ensure that activities do not jeopardize endangered or threatened
plant and animal species, nor destroy or modify the critical habitat of such
species. Under the ESA, certain exploration and production operations, as well
as actions by federal agencies or funded by federal agencies, must not
significantly impair or jeopardize the species or its habitat. The ESA provides
for criminal penalties for willful violations of the Act. Other statutes which
provide protection to animal and plant species and thus may apply to the
Company's operations are the Marine Mammal Protection Act of 1972, 16 U.S.C.
Sections 1361 to 1421h, the Marine Protection and Sanctuaries Act, the Fish
and Wildlife Coordination Act, the Fishery Conservation and Management Act and
the Migratory Bird Treaty Act. The National Historic Preservation Act, 16 U.S.C.
Section 470, may impose similar requirements.

Communication of Hazards. The Occupational Safety and Health Act ("OSHA"),
as amended, 29 U.S.C. Section 651 et. seq., the Emergency Planning and Community
Right-to-Know Act ("EPCRA"), as amended, 42 U.S.C. Section 11001 et. seq., and
comparable state statutes require the Company to organize and disseminate
information to employees, state and local organizations, and the public about
the hazardous materials used in its operations and its emergency planning.

OPERATIONAL HAZARDS AND INSURANCE

Tatham Offshore's exploration, production and development and drilling
operations are subject to the usual hazards incident to the drilling and
production of natural gas and crude oil, such as blowouts, cratering,
explosions, uncontrollable flows of oil, natural gas or well fluids, fires,
pollution, releases of toxic gas and other environmental hazards and risks.
These hazards can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damages and
suspension of operations. In addition, a pipeline may experience damage as a
result of an accident or other natural disaster. To mitigate the impact of
repair costs associated with such an accident or disaster, the Company maintains
insurance of various types that it considers to be adequate to cover its
operations. Such insurance is subject to deductibles that the Company considers
reasonable and not excessive. The Company's insurance does not cover every
potential risk associated with the drilling and production of oil and natural
gas, but is consistent with insurance coverage generally available to the
industry. The

<PAGE> 16

Company's insurance policies do not provide coverage for losses or liabilities
relating to pollution, except for sudden and accidental occurrences.

The occurrence of a significant event not fully insured or indemnified
against, or the failure of a party to meet its indemnification obligations,
could materially and adversely affect the Company's operations and financial
condition. The Company believes that it is adequately insured for public
liability and property damage to others with respect to its operation. However,
no assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable.

INTERNATIONAL OPERATIONS AND RISKS

The Company conducts some of its operations outside the United States.
Risks associated with operating in international markets include foreign
exchange restrictions and currency fluctuations, foreign taxation, changing
political conditions and foreign and domestic monetary policies, expropriation,
nationalization, nullification, modifications or renegotiation of contracts, war
and civil disturbances or other risks that may limit or disrupt markets. The
ability of the Company to compete in the international markets may also be
adversely affected by foreign government regulations that favor or require the
awarding of such contracts to local contractors, or by regulations requiring
foreign contractors to employ citizens of, or purchase supplies from, a
particular jurisdiction. No predictions can be made as to what foreign
government regulations may be enacted in the future that could be applicable to
the Company's operations.

EMPLOYEES

As of August 31, 1999, Tatham Offshore had 27 employees. Prior to August
14, 1998, all individuals, including executive officers, necessary to meet the
financial, geological, engineering and other technical and administrative
requirements of the Company were provided by DeepTech pursuant to a management
agreement with Tatham Offshore (the "Management Agreement"), or affiliates of
DeepTech pursuant to service contracts. The Management Agreement, as amended,
provided for an annual management fee of 26% of DeepTech's overhead expenses.
For the year ended June 30, 1998, DeepTech charged Tatham Offshore $4.4 million
pursuant to such Management Agreement. The Management Agreement was terminated
on August 14, 1998. See " -- Recent Events".

UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION

This Annual Report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management believes," and words or phrases of
similar import. Although management believes that such statements and
expressions are reasonable and made in good faith, it can give no assurance that
such expectations will prove to have been correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Among the key factors that may have a direct bearing on the
Company's results of operations and financial condition are: (i) competitive
practices in the industry in which the Company competes, (ii) the impact of
current and future laws and government regulations affecting the industry in
general and the Company's operations in particular, (iii) environmental
liabilities to which the Company may become subject in the future that are not
covered by an indemnity or insurance, (iv) the impact of oil and natural gas
price fluctuations and (v) significant changes from expectations of capital
expenditures and operating expenses and unanticipated project delays. The
Company disclaims any obligation to update any forward-looking statements to
reflect events or circumstances after the date hereof.

CERTAIN DEFINITIONS

The following are abbreviations and words commonly used in the oil and gas
industry and in this Annual Report.

"bbl" or "barrel" means barrels, a standard measure of volume for oil,
condensate and natural gas liquids which equals 42 U.S. gallons.

"Bcf" means billion cubic feet (or thousand MMcf).

<PAGE> 17

"development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.

"exploratory well" means a well drilled to find commercially productive
hydrocarbons in an unproved area or to extend significantly a known oil or
natural gas reservoir.

"farm-in" or "farm-out" refers to an agreement whereunder the owner of a
working interest in an oil and gas lease delivers the contractual right to earn
the working interest or a portion thereof to another party who desires to drill
on the leased acreage. Generally, the assignee is required to drill one or more
wells in order to earn a working interest in the acreage. The assignor usually
retains a royalty or a working interest after payout in the lease. The assignor
is said to have "farmed-out" the acreage. The assignee is said to have
"farmed-in" the acreage.

"gross" oil and natural gas wells or gross acres are the total number of
wells or acres, respectively, in which the Company has an interest, without
regard to the size of that interest.

"Mbbl" means thousand barrels.

"Mcf" means thousand cubic feet, a standard measure of volume for gas.

"MMbtu" means million British Thermal Units, a unit of heat measure with
one btu being the amount of heat needed to raise the temperature of one pound of
water one degree Fahrenheit.

"MMcf" means million cubic feet.

"net" oil and natural gas wells or "net" acres or "net" production or
reserves are the total gross number of wells or acres, respectively, in which
the Company has an interest multiplied times the Company's working interest in
such wells or acres.

"OCS" means Outer Continental Shelf, an area offshore the United States
over which the federal government has jurisdiction, which extends from the end
of state territorial waters (three to twelve nautical miles offshore, depending
on the state) to 200 nautical miles from shore. The term OCS as used herein
includes not only those areas on the Shelf itself, but those areas in the
flextrend and the deepwater, to a limit of 200 nautical miles, as well.

"royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually carved from the leasehold interest
pursuant to an assignment to a third party reserved by an owner of the leasehold
in connection with a transfer of the leasehold to a subsequent owner.

"working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain
87.5% of the production.

In this Annual Report, natural gas volumes are stated at the legal pressure
base of the state or area in which the reserves are located and at 60 degrees
Fahrenheit.

<PAGE> 18

ITEM 3. LEGAL PROCEEDINGS

RIGCO North America, L.L.C. v. Schlumberger Technology Corporation, et al.,
Cause No. 99-38082. On July 26, 1999, RIGCO sued Schlumberger Technology
Corporation ("STC") and Schlumberger, Canada Ltd. ("SCL") seeking over $51
million in damages in connection with the defendants' charters of the FPS Laffit
Pincay and the FPS Bill Shoemaker. RIGCO's suit alleges causes of action for
gross negligence, breach of contract, negligence, fraud, and negligent
misrepresentation arising from Defendants' management, operation and marketing
of both rigs as well as STC's agreement to renovate the Bill Shoemaker. Both
defendants have answered in the case, but no trial date is set at this time. The
suit is proceeding in state district court in Harris County, Texas.

In re RIGCO North America, L.L.C., et al.; In the United States Bankruptcy
Court for the Southern District of Texas, Corpus Christi Division; Case
Nos. 99-22401-C-11 through 99-22404-C-11 (Jointly Administered under Case No.
99-22401-C-11). On August 9, 1999, RIGCO North America, L.L.C., FPS VI, L.L.C.,
FPS III, Inc., and FPS V, Inc. (collectively, the "Debtors") filed voluntary
petitions for relief under Chapter 11, Title 11 of the United States Code. The
Debtors are operating their businesses and managing their property as
debtors-in-possession. The Debtors have obtained interim authority for the use
of cash collateral through an agreement between the Debtors and the secured
creditors, which agreement is scheduled to expire on October 31, 1999.

RIGCO North America, L.L.C. v. Schlumberger Technology Corporation and
Schlumberger Canada Ltd.; In the United States Bankruptcy Court for the Southern
District of Texas, Corpus Christi Division; Adversary No. 99-2154-C. On
September 3, 1999, RIGCO North America, L.L.C. filed a complaint against
Schlumberger Technology Corporation and Schlumberger Canada Ltd. to avoid a
preferential transfer or transfers pursuant to 11 U.S.C. Section 547 and to
recover the property transferred or its value pursuant to 11 U.S.C. Section 550.
The Defendants have not yet answered the complaint. On September 21, 1999, the
Court entered a Comprehensive Discovery, Mediation and Scheduling Order.

The Company is involved in certain legal proceedings which have arisen in
the ordinary course of business. Management believes that the outcome of such
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

<PAGE> 19

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

As of August 31, 1999, there were approximately 160 holders of record of
the common stock. The following table sets forth the high and low sales prices
for the common stock as quoted on The Nasdaq National Market or the OTC Bulletin
Board for the periods indicated. On May 13, 1999, the Company's common stock was
delisted from the Nasdaq National Market and began trading on the OTC Bulletin
Board. In addition, the table is adjusted for the one for ten reverse common
stock split Tatham Offshore effected on November 24, 1997.

Common Stock Price Range
------------------------
High Low
<S> <C> <C>
YEAR ENDED JUNE 30, 1997
First Quarter........................... 13 3/4 7 1/2
Second Quarter.......................... 9 3/8 4 3/8
Third Quarter........................... 9 3/8 5
Fourth Quarter.......................... 7 1/2 5

YEAR ENDED JUNE 30, 1998
First Quarter........................... 6 7/8 2 13/16
Second Quarter.......................... 5 5/8 2 1/2
Third Quarter .......................... 4 7/8 3
Fourth Quarter.......................... 4 1/4 3

YEAR ENDED JUNE 30, 1999
First Quarter........................... 3 3/4 1 3/8
Second Quarter.......................... 2 11/32
Third Quarter .......................... 3/4 5/16
Fourth Quarter.......................... 5/8 11/32
</TABLE>

Tatham Offshore has never declared or paid cash dividends on its common or
preferred stock. The Company intends to retain any future earnings to fund
growth and does not anticipate paying any cash dividends on its stock in the
foreseeable future. The payment of future dividends, if any, will be determined
by the Board of Directors in light of conditions then-existing, including the
Company's operating results, financial condition, capital requirements, general
business conditions and other factors the Board of Directors deems relevant. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."

The following table summarizes the Company's outstanding equity at June 30,
1999:

Conversion/
Shares Liquidation Dividend Accrued Exchange
Equity Outstanding Preference Rate Dividends Features Symbol
------ ----------- ----------- -------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Senior Preferred Stock(a) -- (a) $1,000 per share 9% $ --(a) (a) N/A

Series A Preferred Stock(b) 17,184,133 (f) $ 1.50 per share 12% $9,363,000 (c)(d) TOFFL (e)

Series B Preferred Stock 74,379 $ 1.00 per share 8% $ 16,000 (c)(d) TOFFO (e)

Series C Preferred Stock(c) 321,205 $ 0.50 per share 4% $ 16,000 (c)(d) TOFFN (e)

Common Stock(b) 26,074,321 (f) N/A -- $ -- -- TOFF (e)
</TABLE>

- --------------

(a) In March 1998, Tatham Offshore eliminated its 9% Senior Convertible
Preferred Stock and replaced this stock with Series B 9% Senior Convertible
Preferred Stock ("Senior Preferred Stock"). In connection with the
Redemption Agreement, Leviathan returned to Tatham Offshore the Senior
Preferred Stock on August 14, 1998 in exchange for certain assets. Tatham
Offshore then eliminated the Senior Preferred Stock. Each share of the
Senior Preferred Stock was senior to all other classes of Tatham Offshore
preferred and common stock in the case of liquidation, dissolution or
winding up of Tatham Offshore. Leviathan held all outstanding shares. The
Senior Preferred Stock was convertible into Series A Preferred Stock using
a conversion ratio equal to (i) the liquidation preference amount plus
accumulated unpaid dividends divided by (ii) $0.9375.

(b) As of June 30, 1998, DeepTech held 28,073,450 shares and 4,670,957 shares
of outstanding common stock and Series A Preferred Stock, respectively. On
August 14, 1998, DeepTech divested itself of this equity ownership through
the Rights Offering.

(c) At any time until December 31, 1998, each share could have been exchanged
for 0.4 Exchange Warrants. Each full Exchange Warrant entitled the holder
thereof to purchase one share of common stock at $6.53 per share. The
Exchange Warrants expired on July 1, 1999. Alternatively, at any time, the
holder of any shares may convert the liquidation value and unpaid dividends
into shares of common stock at $6.53 per share.

(d) Redeemable at the option of Tatham Offshore on or after July 1, 1997.

<PAGE> 20

(e) The common and preferred stock is traded on the OTC Bulletin Board Service.

(f) In connection with the Rights Offering, Tatham Offshore purchased all of
the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of Rights or TB Securities in the Rights Offering,
3,926,746 and 653,365, respectively, and the proceeds from such purchase by
Tatham Offshore were contributed by DeepTech to Tatham Offshore.

RECENT SALES OF UNREGISTERED SECURITIES

The following information relates to sales and other issuances by Tatham
Offshore within the past three fiscal years of Tatham Offshore securities, the
sales or issuances of which were not registered pursuant to the Securities Act
of 1933 (the "Securities Act").

Tatham Offshore, Inc. issued a total of 90,000 shares of its common stock
to Offshore Drilling Consultants, Inc. from September 1997 through March 1998 as
compensation for consulting services related to its Atlantic Canada project.
Prior to January 1998, Offshore Drilling Consultants, Inc. was known as F-W Oil
Interests, Inc. Such transactions were completed without registration under the
Securities Act in reliance on the exemption provided by Section 4(2) of the
Securities Act.

In December 1997, Tatham Offshore issued 26,666,667 shares of its common
stock to DeepTech in exchange for $60 million of Subordinated Convertible
Promissory Notes held by DeepTech. Such transaction was completed without
registration under the Securities Act in reliance on the exemption provided by
Sections 4(2) and 3(a)(9) of the Securities Act.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below for the Company for each of the
three years ended June 30, 1999, 1998 and 1997 and at June 30, 1999 and 1998
have been derived from the consolidated financial statements and notes thereto
which are included elsewhere in this Annual Report. The selected financial data
at and for each of the two years ended June 30, 1995 and 1996 and at June 30,
1997 have been derived from the historical financial statements of the Company.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company and the notes thereto which
are included elsewhere in this Annual Report.

The following selected financial data is included in this Annual Report due
to the requirements of the Securities Exchange Act. With the exception of the
North Atlantic Pipeline Partners' pipeline project, all of the historical
business and operations of Tatham Offshore prior to August 14, 1998 have been
transferred to DeepTech and Leviathan. Management believes that such
information, although important for an understanding of Tatham Offshore's
historical financial results and business, is of little relevance to the
Company's business and operations on a going forward basis.

<PAGE> 21

YEAR ENDED JUNE 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

REVENUE:
Oil and gas sales ............................................ $ -- $ 10,868 $ 20,723 $ 16,070 $ 8,054
Drilling services ............................................ 39,846 672 -- -- --
-------- -------- -------- -------- --------

Total revenue ...................................... 39,846 11,540 20,723 16,070 8,054
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Production and operating expenses ............................ 22,234 5,666 8,465 13,203 13,745
Exploration expenses ......................................... -- 149 542 637 11,459
Depreciation, depletion and amortization ..................... 5,711 3,047 5,364 1,758 1,210
Impairment, abandonment and other ............................ -- -- 41,674 8,000 --
Management fee ............................................... 155 4,375 3,279 4,436 4,967
General and administrative expenses .......................... 6,861 1,371 1,567 1,839 2,145
-------- -------- -------- -------- --------

Total operating costs .............................. 34,961 14,608 60,891 29,873 33,526
-------- -------- -------- -------- --------

Operating income (loss) ...................................... 4,885 (3,068) (40,168) (13,803) (25,472)
Gain on sale of oil and gas properties ....................... -- -- -- 22,641 1,496
Loss from oil and gas operations ............................. (221) -- -- -- --
Interest income and other .................................... 969 223 571 113 836
Interest and other financing costs ........................... (14,115) (1,966) (8,374) (8,161) (11,631)
-------- -------- -------- -------- --------

Net (loss) income ............................................ $ (8,482) $ (4,811) $(47,971) $ 790 $(34,771)
======== ======== ======== ======== ========

Net (loss) income available to common
stockholders ................................................ $(11,537) $ (8,581) $(51,891) $ 509 $(34,771)
======== ======== ======== ======== ========

Basic net (loss) income per common share ..................... $ (0.43) $ (0.50) $ (19.47) $ 0.20 $ (13.91)
======== ======== ======== ======== ========

Diluted net (loss) income per common share ................... $ (0.43) $ (0.50) $ (19.47) $ 0.09 $ (13.91)
======== ======== ======== ======== ========
</TABLE>

AT JUNE 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:

Semisubmersible drilling rigs, net ........................... $134,283 $129,260 $ -- $ -- $ --
Oil and gas properties, net .................................. -- 5,724 30,752 64,900 70,829
Total assets ................................................. 163,774 153,418 41,507 97,130 94,720
Notes payable ................................................ 84,667 64,156 -- -- --
Long-term debt ............................................... -- -- 60,000 60,000 60,000
Stockholders' equity (deficit) ............................... 60,923 75,410 (27,696) 18,862 (20,020)
</TABLE>

<PAGE> 22

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto located elsewhere in
this Annual Report and the information set forth under the heading "Selected
Financial Data." This discussion is intended to assist in the understanding of
Tatham Offshore's financial position and results of operations for each of the
years ended June 30, 1999, 1998 and 1997. Effective June 25, 1998, Tatham
Offshore acquired DeepFlex which, through its subsidiaries, owns the Laffit
Pincay and the Bill Shoemaker. On August 14, 1998, Tatham Offshore transferred
all of its remaining oil and gas properties to Leviathan in connection with the
Merger and related transactions.

The following discussion of results of operations is included in this
Annual Report due to the requirements of the Securities Act. With the exception
of the North Atlantic Pipeline Partners' pipeline project, all of the historical
business and operations of Tatham Offshore prior to August 14, 1998 have been
transferred to DeepTech and Leviathan. Management believes that such
information, although important for an understanding of Tatham Offshore's
historical financial results and business, is of little relevance to the
Company's business and operations on a going forward basis.

RESULTS OF OPERATIONS

YEAR ENDED JUNE 30, 1999 COMPARED WITH YEAR ENDED JUNE 30, 1998

Revenue from drilling services totaled $39.8 million for the year ended
June 30, 1999, $37.6 million of which was generated by the Bill Shoemaker and
$2.2 million by the Laffit Pincay. Revenue from drilling services totaled $0.7
million for the year ended June 30, 1998 and represented revenue from contract
drilling services provided by the Rigs from June 25, 1998 through June 30, 1998.

Operating expenses for the year ended June 30, 1999 totaled $22.2 million
and were attributable to the management fee and direct operating expenses for
the Rigs. During this period, the Bill Shoemaker's operating expenses totaled
$13.6 million and the Laffit Pincay's operating expenses totaled $8.6 million.
Operating expense for the Laffit Pincay during this period included the costs
necessary to maintain the rig in a warm-stacked mode, awaiting a drilling
contract. Operating expense for the Rigs for the period from June 25, 1998
through June 30, 1998 totaled $0.4 million.

Depreciation expense totaled $5.7 million for the period ended June 30,
1999. Depreciation expense for the Bill Shoemaker and the Laffit Pincay totaled
$3.8 million and $1.9 million, respectively. Depreciation expense relating to
the Rigs during the period ended June 30, 1998 totaled $91,000.

General and administrative expense totaled $6.9 million for the year ended
June 30, 1999 as compared to $0.2 million for the year ended June 30, 1998.
General and administrative costs attributable to discontinued operations totaled
$0.3 million for the year ended June 30, 1999 as compared to $4.9 million for
the year ended June 30, 1998. In connection with the Merger, the management
agreement between the Company and DeepTech was terminated on August 14, 1998 and
the Company hired a management team and support personnel required to conduct
its contract drilling services business and implement its Atlantic Canada
strategy. General and administrative expense for the year ended June 30, 1999
includes staff and overhead costs for the operation of the marine services and
Atlantic Canada businesses whereas general and administrative costs for the year
ended June 30, 1998 include costs relative to the Atlantic Canada business only.

Operating income for the year ended June 30, 1999 totaled $4.9 million as
compared to an operating loss of $0.7 million for the year ended June 30, 1998.
The change was due to the items discussed above.

Interest and other income totaled $1.0 million for the year ended June 30,
1999 as compared with $0.2 million for the year ended June 30, 1998 and included
interest income from available cash and other income in 1999 of $618,000 related
to a settlement with El Paso under certain merger related agreements. See --
"Liquidity and Capital Resources."

<PAGE> 23

Interest expense for the year ended June 30, 1999 totaled $14.1 million.
For the year ended June 30, 1999, interest expense relating to the Credit
Facility (as defined herein) totaled $7.7 million. Interest expense relating to
borrowings from Tatham Brothers, Thomas P. Tatham and related affiliates totaled
$6.5 million, including $4.4 million in interest and $2.1 million related to
debt issue costs.

As a result of transferring all of its oil and gas properties in the Gulf
to DeepTech and Leviathan in connection with the Merger, the Company
discontinued its oil and gas operations effective August 14, 1998 and had a $0.2
million loss from discontinued operations for the year ended June 30, 1999 as
compared with a net loss from discontinued operations of $4.3 million for the
year ended June 30, 1998. During the period from July 1, 1998 through August 14,
1998, the Company sold 479 million cubic feet ("MMcf") of natural gas and 1,200
barrels of oil at average prices of $1.86 per thousand cubic feet ("Mcf") of
natural gas and $7.13 per barrel of oil, respectively. During the year ended
June 30, 1998, the Company sold 4,532 MMcf of gas and 16,295 barrels of oil at
average prices of $2.34 per Mcf and $16.24 per barrel, respectively.

Tatham Offshore eliminated all of its Senior Preferred Stock and the
associated preferred stock dividends in arrears and cancelled 653,365 shares of
its Series A Preferred Stock in connection with the Merger. Tatham Offshore's
remaining preferred stock dividends totaled $3.1 million for the year ended June
30, 1999 as compared with $3.8 million for the year ended June 30, 1998. After
taking preferred stock dividends into account, the Company's net loss allocable
to common shareholders for the year ended June 30, 1999 was $11.5 million, or
$0.43 per share, as compared with a net loss allocable to common shareholders
for the year ended June 30, 1998 of $8.6 million, or $0.50 per share.

YEAR ENDED JUNE 30, 1998 COMPARED WITH YEAR ENDED JUNE 30, 1997

Revenue from drilling services totaled $0.7 million for the year ended June
30, 1998 and represented revenue from the Rigs for the period June 25, 1998
through June 30, 1998. No drilling service revenue was recorded by the Company
for the year ended June 30, 1997 since the Company did not own the Rigs during
that period.

Operating expenses for the year ended June 30, 1998 totaled $0.4 million
and were attributable to the management fee and direct operating expenses for
the Rigs for the period June 25, 1998 through June 30, 1998. No operating
expense for the Rigs was recorded by the Company for the year ended June 30,
1997 since the Company did not own the Rigs during that period.

Depreciation expense totaled $91,000 for the year ended June 30, 1998. No
depreciation expense relating to the Rigs was recorded during the year ended
June 30, 1997 since the Company did not own the Rigs during that period.

General and administrative expense totaled $0.9 million for the year ended
June 30, 1998 as compared to $0.7 million for the year ended June 30, 1997.
General and administrative costs attributable to discontinued operations totaled
$4.9 million and $4.1 million for the years ended June 30, 1998 and 1997,
respectively. General and administrative expense includes staff and overhead
costs allocated to the Company under a management agreement with DeepTech of
$4.4 million and $3.3 million for the years ended June 30, 1998 and 1997,
respectively. In connection with the Merger, the management agreement between
the Company and DeepTech was terminated on August 14, 1998. General and
administrative expense for the year ended June 30, 1998 includes staff and
overhead costs for the operation of the marine services and Atlantic Canada
businesses whereas general and administrative costs for the year ended June 30,
1997 include costs relative to the Atlantic Canada business only.

Operating loss for the year ended June 30, 1998 totaled $0.5 million as
compared to an operating loss of $0.2 million for the year ended June 30, 1997.
The change was due to the items discussed above.

Interest and other income totaled $0.2 million for the year ended June 30,
1998 as compared with $0.6 million for the year ended June 30, 1997.

Interest expense for the year ended June 30, 1998 totaled $1.9 million as
compared with $8.4 million for the year ended June 30, 1997 and primarily
related to interest under the $60 million principal amount of Subordinated

<PAGE> 24

Convertible Promissory Notes (the "Subordinated Notes") held by DeepTech, which
were converted into shares of Tatham Offshore common stock in December 1997. See
"--Liquidity Outlook."

Subsequent to transferring all of its oil and gas properties in the Gulf to
DeepTech and Leviathan in connection with the Merger, the Company reported a net
loss from discontinued operations of $4.3 million for the year ended June 30,
1998 as compared with a net loss from discontinued operations of $47.8 million
for the year ended June 30, 1997. During the year ended June 30, 1998, the
Company sold 4,532 MMcf of natural gas and 16,295 barrels of oil at average
prices of $2.34 per Mcf of natural gas and $16.24 per barrel of oil,
respectively. During the year ended June 30, 1997, the Company sold 7,180 MMcf
of natural gas and 170,000 barrels of oil at average prices of $2.36 per Mcf and
$22.35 per barrel, respectively.

Tatham Offshore's preferred stock dividends totaled $3.8 million for the
year ended June 30, 1998 as compared with $3.9 million for the year ended June
30, 1997. After taking preferred stock dividends into account, the Company's net
loss allocable to common shareholders for the year ended June 30, 1998 was $8.6
million, or $0.50 per share, as compared with a net loss allocable to common
shareholders for the year ended June 30, 1997 of $51.9 million, or $19.47 per
share. The net loss per share calculation for both periods has been adjusted to
reflect the one-for-ten reverse stock split that was completed in November 1997.

LIQUIDITY AND CAPITAL RESOURCES

Prior to the Merger and related transactions completed on or before August
14, 1998, the Company's exploration and production activities generated and
utilized substantially all of the operating cash flow. Prospectively, the
Company's contract drilling activities are expected to generate substantially
all of the operating cash flow, at least during the near term. See "-- Liquidity
Outlook."

Sources of Cash. Effective with the Merger transactions, the Company
transferred all of its oil and gas properties in the Gulf to DeepTech and
Leviathan. The Company expects to be dependent upon cash on hand and cash
generated from its drilling services operations to pay its operating expenses
and satisfy its other obligations. However, as described below, the Company will
need to raise substantial capital (equity, debt or both) or enter into other
arrangements to allow the Company to implement its business strategy in Atlantic
Canada.

On August 9, 1999, RIGCO, FPS VI, FPS III, Inc. and FPS V, Inc. filed
voluntary petitions under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Filing"). RIGCO owns a 100% interest in the Bill Shoemaker and a 25%
undivided interest in the Laffit Pincay. FPS VI owns a 75% undivided interest in
the Laffit Pincay. FPS III, Inc. and FPS V, Inc. are the owners of RIGCO and FPS
VI with FPS III, Inc. owning a 50% interest in RIGCO and FPS V, Inc. owning a
50% interest in RIGCO and a 100% interest in FPS VI. The proceedings of RIGCO,
FPS VI, FPS III, Inc. and FPS V, Inc. have been consolidated for administrative
purposes. As a result of the Bankruptcy Filing, the Rigs are being managed by
the Company's subsidiaries as debtors-in-possession. Under the provisions of the
Bankruptcy Code, the debtors-in-possession have the exclusive right, for 120
days following the date of the Bankruptcy Filing, to file a plan of
reorganization with the Bankruptcy Court. The syndicate of lenders under the
Credit Facility have a secured interest in substantially all of the assets of
RIGCO and FPS VI. Any cash received by RIGCO and FPS VI becomes additional
collateral for the secured lenders (the "Cash Collateral") under the Credit
Facility. RIGCO and FPS VI as debtors-in-possession have been granted temporary
permission by the Bankruptcy Court for limited use of the Cash Collateral to pay
operating and maintenance costs for the Rigs and to pay certain limited general
and administrative costs of Tatham Offshore. If either of the Rigs is not
employed for any extended period of time, the absence of associated revenues may
have a material adverse effect on the Company, including limiting the Company's
ability to raise capital from external sources. The Laffit Pincay has not been
employed since mid-August 1998 and it is uncertain as to when and at what rates
it will be employed in the future. The Bill Shoemaker is currently under
contract to Husky Oil Operations Limited under an agreement that provides for
two firm wells with options to drill up to seven additional wells at
pre-determined rates. Husky Oil Operations Limited exercised one of its options
for an additional well the drilling and testing of which should be completed in
October 1999. Husky Oil Operations has declined to exercise any of its
additional well options under this agreement. As of this date, the Company has
not entered into a drilling contract for the Bill Shoemaker subsequent to the
Husky Oil Operations Limited agreement. See "-- Uses of Cash" and "-- Liquidity
Outlook."

<PAGE> 25

On June 30, 1999, RIGCO entered into a committed draw facility with Tatham
Investment Corp., which is 100% owned by Thomas P. Tatham. Tatham Investment
Corp. agreed to loan up to $750,000 to RIGCO for working capital purposes. Any
loans bear interest at the prime rate plus 3% and are due on September 30,
1999. On June 30, 1999, RIGCO borrowed $439,062 under this agreement.

Effective July 1, 1999, Tatham Offshore entered into a revolving draw
facility with Tatham Investment Corp. The revolving draw facility provides for
loans, at the lenders' sole discretion, by Tatham Investment Corp. to the
Company in amounts up to $5.0 million. The revolving draw facility bears
interest at the rate of 15% per annum and is payable upon demand by the lender.
Through September 15, 1999, the Company has borrowed $2.6 million under this
facility. The Company has agreed to pledge all of its equity ownership in
certain wholly-owned subsidiaries of the Company as well as a certain promissory
note issued by Tatham Offshore Canada, Limited.

Uses of Cash. The Company expects that its primary uses of cash, as
permitted by the Bankruptcy Court, will consist of (i) interest payments on the
Credit Facility, (ii) amounts necessary to fund capital expenditures related to
the Rigs that are not funded by customers, (iii) amounts necessary to staff and
maintain the Rigs while they are not under contract, and (iv) amounts necessary
to pay general and administrative and other operational expenses.

In addition, the Company will use available cash from non-rig related
borrowings to fund the pursuit of its business strategy in Atlantic Canada. Such
uses will include funding initial expenditures related to the North Atlantic
Pipeline Partners' pipeline project, the remainder of the Company's Atlantic
Canada strategy and any of the Company's other potential capital expenditures.

Oil prices declined substantially during 1998, which has caused a
significant decline in the demand for drilling rigs. Although oil prices have
strengthened in recent months, the demand for drilling rigs has not improved
significantly. The Laffit Pincay does not have a current drilling contract and
was warm-stacked in Grand Isle Block 71, offshore Louisiana from mid-August 1998
through early February 1999. In early February 1999, the Laffit Pincay was
relocated to a shipyard in Pascagoula, Mississippi pending the completion of
engineering studies and obtaining financing necessary to upgrade the rig to
enable it to drill in a dynamic position mode in water depths up to 5,000 feet.
In addition to the Laffit Pincay, there are several similarly equipped
semisubmersibles currently deployed in the Gulf that do not have current
drilling contracts or commitments. Cash costs to warm-stack the Laffit Pincay in
Grand Isle Block 71 were approximately $600,000 per month. Cash costs to
maintain the Laffit Pincay in the shipyard pending the upgrade are approximately
$250,000 per month.

Following the completion of the Husky Oil Operation Limited contract, the
Bill Shoemaker will be stacked in a facility in Newfoundland, Canada pending
additional contract drilling commitments in Canada or other suitable locations
worldwide. The costs to stack the Bill Shoemaker in Canada are approximately
$300,000 per month.

North Atlantic Pipeline Partners is the sponsor of a proposal to construct
a natural gas pipeline from offshore Newfoundland and Nova Scotia to Seabrook,
New Hampshire. As of June 30, 1999, Tatham Offshore Canada Limited, the Canadian
representative of North Atlantic Pipeline Partners, has incurred $12.6 million
in developmental costs in connection with such project and related
infrastructure projects. The Company anticipates that the ultimate capital costs
of the pipeline and related projects, if approved, could be in excess of several
billion dollars. The Company plans to obtain debt and equity financing and/or
secure joint venture partners to satisfy the capital requirements for the
Atlantic Canada projects, as required.

Liquidity Outlook. The Company intends to fund its immediate cash
requirements with cash on hand, cash from its drilling services operations as
authorized from time to time by the Bankruptcy Court, and loans under the
revolving draw facility with Tatham Investment Corp. At June 30, 1999, the
Company had $0.5 million of cash and cash equivalents. As of June 30, 1999,
Tatham Offshore and its subsidiaries owed a total of $102.9 million in debt,
accrued interest and other accounts payable.

<PAGE> 26

On September 30, 1996, RIGCO entered into a $65 million senior secured
credit facility with a syndicate of lenders (as amended, the "Credit Facility").
Proceeds from the Credit Facility were used to acquire the Bill Shoemaker, to
fund significant upgrades to the Bill Shoemaker, and to retire $30.3 million of
other rig related indebtedness. In April 1997, the Credit Facility was amended
to provide for an additional $12 million to fund the remaining refurbishments
and upgrades to the Bill Shoemaker. The Credit Facility (i) matured on April 30,
1999, (ii) provides for interest at the prime rate plus 3% per annum (10 3/4% at
June 30, 1999), payable quarterly, (iii) is secured by the two semisubmersible
drilling rigs and all of the related assets, (iv) required a quarterly principal
payment of excess cash flow as defined in the credit agreement with a minimum
principal amortization of $250,000 per quarter beginning on December 31, 1996
and ending on September 30, 1998, (v) provided the lenders warrants to acquire a
5% minority equity interest in the subsidiaries which own the Rigs, and (vi) is
subject to customary conditions and covenants, including the maintenance of a
minimum level of working capital. As of June 30, 1999, amounts outstanding under
the Credit Facility totaled $58.1 million in principal and $3.4 million in
accrued interest. On September 25, 1998, the parties to the Credit Facility
amended the agreement to (i) extend the maturity date from September 30, 1998 to
March 31, 1999, (ii) waive all principal payments until the maturity date, and
(iii) extend the expiration date on the warrants issued to the lenders under the
original Credit Facility to March 31, 1999. RIGCO paid a total of 0.5% of the
outstanding principal balance to the lenders in connection with the amendment.

On March 31, 1999, the parties to the Credit Facility amended the agreement
to (i) extend the maturity to April 30, 1999, (ii) waive all principal and
interest payments until the maturity date and (iii) extend the expiration date
on the warrants issued to the lenders under the original Credit Facility to
April 30, 1999. RIGCO paid a total of $100,000 to the lenders in connection with
the amendment and agreed to increase the interest rate on the outstanding
principal to the default rate under the Credit Facility (the prime rate plus 5%
per annum, which equaled 12 3/4% at June 30, 1999) for the period of the
extension. RIGCO did not make the principal payment or interest payment due on
April 30, 1999, is presently in default under the terms of the Credit Facility,
and has filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code.

Effective January 25, 1998, Sedco Forex entered into a one-year contract
with Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the
Gulf. The Company was notified by Sedco Forex that as of November 18, 1998 Shell
would cease using the Bill Shoemaker to conduct drilling operations in the Gulf.
The Company has been paid for drilling services performed by the Bill Shoemaker
for Shell through November 18, 1998 but has not been paid for any period since
that time. On April 20, 1999, RIGCO gave Sedco Forex a written termination
notice of the management and charter agreement for the Bill Shoemaker. On July
26, 1999, RIGCO filed a petition in the 165th Judicial District Court in Harris
County, Texas, alleging more than $51 million in actual damages against
Schlumberger Technology Corporation and Schlumberger Canada, Ltd. (collectively,
"Schlumberger") for claims arising out of Schlumberger's Sedco Forex Division's
marketing, manning, management and operation of the Bill Shoemaker and Laffit
Pincay pursuant to certain charter, make-ready and other agreements and
arrangements. The allegations include claims of gross negligence, breach of
contract, fraud, negligent misrepresentation and negligence. RIGCO is seeking an
unspecified amount of exemplary damages. RIGCO and FPS VI have alleged in
bankruptcy court proceedings that the manner in which Schlumberger performed its
duties with respect to the Bill Shoemaker and Laffit Pincay during the course of
the management and charter agreements resulted in RIGCO's financial difficulties
and caused it to default on its secured debt obligations.

Following the early release of the rig by Shell, the Bill Shoemaker was
towed to a shipyard in Galveston, Texas where it underwent significant
unanticipated refurbishments in preparation for mobilization to the Grand Banks
area in Atlantic Canada. Capital costs, including crew costs while in the
shipyard, for the make-ready totaled approximately $8.5 million. Following the
make-ready, the Bill Shoemaker was mobilized to the Grand Banks area in Atlantic
Canada to conduct a two-well program (with three options permitting up to seven
additional wells) at predetermined rates for Husky Oil Operations Limited. In
connection with the Bill Shoemaker make-ready agreement with Sedco Forex, RIGCO
secured a letter of credit for $6.5 million to secure payment to Sedco Forex.
The letter of credit was secured with funds provided by Thomas P. Tatham,
Chairman of the Board and Chief Executive Officer of the Company. In exchange
for providing the funds to secure the letter of credit, the Company paid a fee
of $500,000 to Mr. Tatham. The Company has agreed to pay Mr. Tatham, as
liquidated damages, $10,000 per day from February 15, 1999 until such funds are
returned. The liquidated damages payment would be in the form of a promissory
note

<PAGE> 27

bearing interest at the rate of 18% per annum. All of the funds securing the
letter of credit were drawn by Sedco Forex for payments under the make-ready
agreement.

Management believes that revenue from the Bill Shoemaker contracts will
provide sufficient liquidity to permit the Company to pay (i) its operating
expenses on both the Bill Shoemaker and the Laffit Pincay and (ii) its rig
related general and administrative costs while receiving payments pursuant to
the Husky Oil Operations Limited agreement. The Company currently does not have
a replacement drilling agreement for the Bill Shoemaker. The Company will be
dependent on cash reserves generated from the Husky Oil Operations Limited
agreement, or funds from new financing arrangements, to fund its ongoing cash
requirements until such time as additional contract drilling services are
secured for either the Bill Shoemaker or the Laffit Pincay. Any additional
capital expenditures for either of the rigs will need to be funded by customers
or other third party sources.

On March 23, 1999, RIGCO assumed the management and operational
responsibility for the Laffit Pincay. The Laffit Pincay is currently stacked in
a shipyard in Pascagoula, Mississippi. The Company is in the process of
completing engineering studies and obtaining cost estimates to upgrade the rig
to enable it to drill in a dynamic position mode in water depths up to 5,000
feet. The Company believes that the Laffit Pincay, upgraded for dynamic
positioned drilling, would make an ideal candidate for drilling opportunities
offshore Brazil and West Africa. Although there can be no assurances, the
Company anticipates that with an acceptable long-term contract, the capital
requirements for the upgrade could be secured with either United States or
Canadian government guarantees. Although the engineering studies and cost
estimates are not complete, preliminary estimates indicate that the upgrades
will cost approximately $90-$100 million and could be completed within a twelve
month period. The Company is currently marketing the Laffit Pincay to obtain a
long-term drilling contract to support the capital requirements for the upgrade.
In addition, the Company continues to market the Laffit Pincay for drilling
services in the Gulf and FPS opportunities offshore Brazil and Atlantic Canada.

In connection with the Merger, the Company entered into a $22.9 million
short-term financing arrangement with Tatham Brothers (as amended, the
"Short-Term Facility") to provide for funds to (i) satisfy approximately $1.6
million of cash requirements with respect to the Redemption Agreement with
Leviathan, (ii) pay $1.4 million to DeepTech in connection with the Management
Agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9
million to TB Securities with respect to obligations under the Rights Offering,
(iv) fund a $7.5 million letter of credit for potential tax liabilities, (v)
refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and
expenses associated with the Short-Term Facility. Tatham Brothers is an
affiliate of Thomas P. Tatham and the parent company of TB Securities. The
Short-Term Facility accrued interest at the rate of 12% per annum and was due on
January 15, 1999. On January 15, 1999, the Company and Tatham Brothers agreed to
refinance the original $22.9 million principal plus $1.1 million of accrued
interest into a new short-term loan which bears interest at the rate of 15% per
annum and was due March 31, 1999. In connection with the refinancing, the
Company paid Tatham Brothers a fee of $1.0 million in the form of a 15%
subordinated convertible note (the "Subordinated Convertible Note"). The
Subordinated Convertible Note bears interest at the rate of 15% per annum and is
due on August 15, 2001. Tatham Brothers may convert the principal amount of the
Subordinated Convertible Note and accrued unpaid interest into shares of Common
Stock of the Company based on the average market price for the five trading days
prior to the end of the previous calendar quarter. The Short-Term Facility is
secured by a pledge of DeepFlex of its interest in certain payment-in-kind
Subordinated Promissory Notes issued by RIGCO and FPS V, Inc., both subsidiaries
of the Company, which had an outstanding balance of approximately $78.9 million
at June 30, 1999. On March 31, 1999, the Company and Tatham Brothers extended
the Short-Term Facility until April 30, 1999. Pursuant to the terms of the
Short-Term Facility, Tatham Offshore was required to pay $24.1 million in
principal and $0.3 million in interest on April 30, 1999. Tatham Offshore did
not make payment of such amount; as a result, an Event of Default has occurred
and is continuing under the Short-Term Facility.

Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from
Bank of America, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex
to fund certain improvements to the Rigs. The loan bears interest at the prime
rate per annum and is due on September 30, 1999 or on demand. The loan from
Tatham Brothers to DeepFlex, plus accrued interest, was included in the amount
payable under the short-term financing arrangement discussed above.

<PAGE> 28

The Company is refocusing its business from the development, exploration
and production of oil and gas in the Gulf to an integrated frontier investment
strategy targeting Atlantic Canada with initial emphasis on the offshore
contract drilling business. The Company believes that the Atlantic Canada region
offers significant investment opportunities and the Company plans to expand the
number of drilling rigs it will own as well as diversify its business to include
the North Atlantic pipeline project, related gas processing facilities, a
facility for the generation of electricity and other related investments
including upstream exploration and production activities and the acquisition of
oil and gas concessions or license interests. The Company has incurred
approximately $12.6 million in costs associated with its Atlantic Canada
strategy.

The ability of the Company to satisfy its future capital needs with respect
to its planned Atlantic Canada strategy, particularly its ability to obtain
regulatory approval and financing for the North Atlantic Pipeline Partners'
pipeline project, will depend upon its ability to raise substantial amounts of
additional capital and to implement its business strategy successfully. With
respect to the Company's Atlantic Canada strategy, (i) the Company does not
currently possess the capital necessary to implement its business strategy
completely and there can be no assurances that the Company will be able to
obtain sufficient capital for any or all of the projects, (ii) there can be no
assurances that these projects and other opportunities will prove to be
economical or that they will occur, and (iii) many of these projects will
require governmental approvals, almost all of which the Company has yet to
receive. Moreover, if there are developments that the Company determines to be
indicative of a lack of reasonable opportunity to realize benefits for the
Company's stockholders, then the Company will pursue other opportunities,
wherever located, as the Company determines to be in the Company's best
interests. The Company or its Canadian subsidiaries may seek to obtain
additional equity capital to assist in the funding of the ongoing day-to-day
operations of its planned Atlantic Canada strategy.

Since the Nasdaq National Market has delisted Tatham Offshore's common
stock, the holders thereof will suffer a decrease in marketability of their
shares and the liquidity of their investment in Tatham Offshore's common stock
and its preferred stocks which are convertible into common stock. This potential
decrease in the marketability and liquidity of the Company's common and
preferred stock may have a material adverse effect on Tatham Offshore's ability
to access equity markets in the future. See Item 1. "Consolidated Financial
Statements -- Notes to the Consolidated Financial Statements -- Note 7 --
Commitments and Contingencies."

Tatham Offshore has never declared or paid dividends on its common or
preferred stock. Tatham Offshore expects to retain all available earnings
generated by its operations for the growth and development of its business.

YEAR 2000. The year 2000 issue is the result of computer programs that were
written using two digits rather than four to define the year. The Company
believes that substantially all of its information technology software and
equipment are year 2000 compliant and that this problem will have no affect on
the Company's internal operations. The Company believes that the costs relating
to the assessment of the year 2000 issue will be de minimus. Although the
Company intends to interact only with those third parties that have year 2000
compliant computer systems, it is impossible for the Company to monitor all such
systems. The Company has initiated discussions with the operator of the Bill
Shoemaker and has initiated external IT and Non-IT system reviews. Based on
initial discussions and reviews, the Company believes that there will be no
disruption in the operation of its drilling rigs as a result of the year 2000
issue. Currently, the Company has no information concerning the year 2000
compliance status of its customers and vendors. In the event the Company or the
various companies on which we principally rely experience year 2000 compliance
problems, adverse consequences could include the interruption of drilling
services aboard the Rigs, delays in shipments of materials and supplies required
to operate the Rigs, delays in transferring personnel to and from the Rigs, and
delays in receiving funds from customers or in making payments to suppliers.
There can be no assurances that such systems will not have a material adverse
impact on the Company's business and operations. The Company has not yet
developed a contingency plan for year 2000 issues to address worst-case business
interruptions. However, once all of the identification and reviews of system
issues are completed, the Company will develop a contingency plan to mitigate
the risk of business interruptions, if any.

UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION

This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should,"

<PAGE> 29

"may," "management believes," and words or phrases of similar import. Although
management believes that such statements and expressions are reasonable and made
in good faith, it can give no assurance that such expectations will prove to
have been correct. Such statements are subject to certain risks, uncertainties
and assumptions. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Among the key factors
that may have a direct bearing on the Company's results of operations and
financial condition are: (i) competitive practices in the industry in which the
Company competes, (ii) the impact of current and future laws and government
regulations affecting the industry in general and the Company's operations in
particular, (iii) environmental liabilities to which the Company may become
subject in the future that are not covered by an indemnity or insurance, (iv)
the impact of oil and natural gas price fluctuations and (v) significant changes
from expectations of capital expenditures and operating expenses and
unanticipated project delays. The Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is exposed to some market risk due to the floating interest
rate under the RIGCO Credit Facility. See "-- Note 5 -- Indebtedness." Under the
RIGCO Credit Facility, the remaining principal was due on April 30, 1999 along
with the final interest payment. On June 30, 1999, the Credit Facility had
principal balance of $58,148,000 and an interest rate based on the prime rate
plus 3% (10 3/4% at June 30, 1999) and a default interest rate based on the
prime rate plus 5% (12 3/4% at June 30, 1999). A 1 1/2% increase in interest
rates could result in a $900,000 annual increase in interest expense on the
existing principal balance.

On April 3, 1997, RIGCO entered into an interest rate cap agreement with
Citibank, N.A., which covered $36.5 million of the debt and provided a maximum
fixed effective interest rate of 11.74% and which terminated on September 30,
1998.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 14(a) hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

27
<PAGE> 30

PART III

ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

The following table sets forth certain information as of August 31, 1999,
regarding the executive officers and directors of Tatham Offshore. Each
executive officer named in the following table has been elected to serve until
his successor is duly appointed or elected or until his earlier removal or
resignation from office.

There is no family relationship among any of the executive officers of
directors of Tatham Offshore, and no arrangement or understanding exists between
any executive officer or director of Tatham Offshore and any other person
pursuant to which he or she was or is to be selected as an officer or director.

<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Thomas P. Tatham 53 Chairman of the Board,
Chief Executive Officer

Dennis A. Kunetka 50 Chief Financial Officer,
Senior Vice President and Secretary

Harvey O. Fleisher 53 Senior Vice President - Marine Services

Ira Gervais 53 Senior Vice President - Operations
RIGCO North America, L.L.C.

Philip German 46 Vice President - Engineering
Tatham Offshore Canada Limited

Kenneth L. Hamilton 52 Vice President, Treasurer
and Assistant Secretary

Dennis J. Lubojacky 46 Vice President - Controller
and Financial Planning

Kenneth E. Beeney 40 Director

James G. Niven 53 Director

Roger B. Vincent, Sr. 54 Director

Don W. Wilson 52 Director
</TABLE>

Thomas P. Tatham has served as Chairman of the Board and a Director of the
Company since its inception in 1988. In addition, Mr. Tatham served as Chairman
of the Board, Chief Executive Officer and a Director of DeepTech International
Inc. ("DeepTech") and Chairman of the Board of Leviathan Gas Pipeline Company
("Leviathan"), affiliates of Tatham Offshore, since October 1989 and February
1989, respectively, through August 14, 1998. In addition, Mr. Tatham served as
Chief Executive Officer of Leviathan from February 1989 until June 1995. Mr.
Tatham sold all of his interests in DeepTech and Leviathan to El Paso Energy in
August 1998. Mr. Tatham has over 29 years experience in the oil and gas
industry. He founded Mid American Oil Company in 1970 and served as Chairman of
the Board and Chief Executive Officer until he sold his interest therein to
Centex Corporation in 1979. In 1979, Mr. Tatham founded Tatham Corporation to
acquire Sugar Bowl Gas Corporation ("Sugar Bowl"), the second largest intrastate
pipeline system in Louisiana. He served as

<PAGE> 31
Chairman of the Board of Tatham Corporation from 1979 to December 1983, at which
time it sold the assets of Sugar Bowl to a joint venture between MidCon Corp.
and Texas Oil and Gas, Inc. From 1984 to 1988, Mr. Tatham pursued personal
investments in various industries, including the oil and gas industry. Mr.
Tatham served as a director of J. Ray McDermott, S.A. from its inception in
February 1995 through August 1997.

Dennis A. Kunetka has served as Senior Vice President - Corporate Finance
of the Company since October 1993 and as Chief Financial Officer and Secretary
since January 1998. Mr. Kunetka served as Senior Vice President - Corporate
Finance and Investor Relations of DeepTech and Leviathan from August 1993
through August 14, 1998. Prior to joining DeepTech, Mr. Kunetka served as Vice
President and Controller of United Gas Pipe Line Company and its parent company,
United Gas Holding Corporation. Prior to joining United in 1984, Mr. Kunetka
spent 11 years with Getty Oil Company in various tax, financial and regulatory
positions. Mr. Kunetka holds B.B.A. and M.S.A. degrees from the University of
Houston, a J.D. degree from South Texas College of Law and is a certified public
accountant.

Harvey O. Fleisher has served as Senior Vice President of Marine Services
of the Company since August 1998. Mr. Fleisher has served as Executive Vice
President of DeepFlex since April 1995. From June 1988 to April 1995, Mr.
Fleisher held various engineering and operations positions with DeepTech
entities. Mr. Fleisher has over 27 years experience in the offshore oil and gas
industry primarily in the floating drilling and production areas. Prior to
joining DeepTech in 1988, Mr. Fleisher worked for two years as an independent
consultant and 14 years with Sonat Offshore Drilling, Inc. (formerly The
Offshore Company). Mr. Fleisher is a Registered Professional Engineer and holds
M.S. and B.S. degrees in Industrial Engineering from Texas A&M University.

Ira Gervais has served as Senior Vice President of Operations of RIGCO
North America, L.L.C. since April 1999. Prior to joining the Company, Mr.
Gervais was employed with Sedco Forex, a division of Schlumberger Technology
Corporation, and was in charge of rig operations. Mr. Gervais has over 25 years
of experience in the offshore oil and gas industry and held various positions
throughout the world in engineering, operations, and rig management until his
recent retirement from Schlumberger. During his tenure with Schlumberger, Mr.
Gervais was also assigned to many Research and Engineering projects and new rig
building projects for Sedco. Prior to joining Sedco, Mr. Gervais worked for
eight years for Avondale shipyards in various ship and rig building projects.
Mr. Gervais holds a B.S. degree from the University of Texas at Arlington and an
ASEE from Delgado Junior College. Mr. Gervais also holds a Liberian Chief
Engineers Marine license and is a certified DNV Quality Lead Auditor.

Philip German has served as Vice President - Engineering of Tatham Offshore
Canada Limited since August 1998. From July 1997 through August 1998, Mr. German
served as a consultant to the Company. From July 1995 through July 1997, Mr.
German served as the Chief Pipeline Engineer for Intec Engineering, Inc. From
June 1990 through July 1995, Mr. German served as Vice President of J.P. Kenny
Inc. of Houston. From 1981 through 1990, Mr. German was associated with J.P.
Kenny and Partners, Ltd., London. Mr. German has been actively involved in
offshore pipeline and onshore pipeline and facilities projects in the U.K.,
Norway, Australia, North Africa, East Africa and China. In addition to his work
with engineering companies, Mr. German has also spent extended periods acting on
behalf of oil and gas companies, most notably Statoil and Conoco. Mr. German
holds a Bachelor of Science degree in Mechanical Engineering from Thames
Polytechnic, London.

Kenneth L. Hamilton has served as Vice President - Treasurer and
Assistant Secretary of the Company since August 1998. Mr. Hamilton served as
Corporate Tax Director of DeepTech from August 1997 through August 14, 1998.
Prior to joining DeepTech, Mr. Hamilton was a shareholder in Verne Sanders &
Associates, a certified public accounting firm for 11 years. Mr. Hamilton served
as Vice President-Controller of Tatham Corporation from 1981 to 1986 and as Tax
Manager with Price Waterhouse LLP in Houston from 1974 to 1981. Mr. Hamilton
holds a B.A. degree from the University of Texas at El Paso and is a certified
public accountant.

Dennis J. Lubojacky has served as Vice President - Controller and
Financial Planning of the Company since August 1998. Mr. Lubojacky served as
Controller of DeepFlex from August 1996 through August 1998. Prior to joining
DeepTech, Mr. Lubojacky worked for two years as an independent consultant after
serving as Vice President - Controller for Nabors Yemen Ltd. from 1991 to 1994.
Mr. Lubojacky has over 24 years of experience in the oil and gas industry,
primarily with offshore and onshore drilling contractors in various accounting
and financial management positions. Mr. Lubojacky holds a B.B.A. degree from Sam
Houston State University and is a certified public accountant.

<PAGE> 32

Kenneth E. Beeney has served as a Director of the Company since August
1993. In addition, Mr. Beeney served as Vice President - Chief Geophysicist of
the Company from August 1993 through August 14, 1998. Since August 17, 1998, Mr.
Beeney has served as Exploration Manager - Deepwater for Pennzoil Exploration
and Production. Mr. Beeney has 16 years of exploration experience, with a
primary focus in the Gulf of Mexico. Prior to joining Tatham Offshore in 1989,
Mr. Beeney worked for Tenneco Oil Company for eight years and Anadarko Petroleum
Corporation on a variety of exploration assignments. Mr. Beeney received a B.S.
in Geophysics from the Colorado School of Mines.

James G. Niven has served as a Director of the Company since June 1994 and
as a General Partner of Pioneer Associates, a venture capital investment
company, since 1982. Mr. Niven has been a Senior Vice President of Sotheby's
Inc. since November 1996 and is currently a Director of The Lynton Group, Inc.
and HealthPlan Services, Inc. He served as Chairman of the Board of Global
Natural Resources from 1989 to 1995 and is a member of the Board of Managers of
Memorial Sloan-Kettering Cancer Center, and a Trustee of the Museum of Modern
Art, and the National Center for Learning Disabilities, Inc.

Roger B. Vincent, Sr. has served as a Director of the Company since
January 1996. Mr. Vincent is President of Springwell Corporation, a corporate
finance advisory firm located in New York. Prior to founding Springwell, Mr.
Vincent spent 18 years with Bankers Trust Company where he was a Managing
Director of the firm as well as in charge of the firm's Client Group. Mr.
Vincent is a director of AmeriGas Propane, Inc., a general partner of AmeriGas
Partners, L.P. (NYSE listed), a Trustee of the GCG Trust of the Golden American
Life Insurance Company (a subsidiary of the ING Group) and a member of the
Policy Committee of Atlantic Asset Management Partners, L.L.C. Mr. Vincent is a
graduate of Yale University and Harvard Business School.

Don W. Wilson has served as Director of Tatham Offshore, Inc. since
December 1998 and is currently President and Chief Operating Officer of Odyssea
Marine, Inc. From January 1998 through September 1998, Mr. Wilson served as
President and Chief Operating Officer of Prime Natural Resources, Inc. Mr.
Wilson served as President and Chief Executive Officer of FW Oil Interests, Inc.
from 1996 through 1997. During 1995, Mr. Wilson served as Executive Vice
President of J. Ray McDermott, S.A. From 1993 to 1995, Mr. Wilson served as
President of O.P.I. International, Inc., prior to its merger with J. Ray
McDermott, S.A. From 1975 through 1993, Mr. Wilson was employed by Brown & Root,
Inc., and served in various operational and managerial positions. During his
employment with Brown & Root, Inc., Mr. Wilson was Vice President of Global
Operations from 1990 to 1993. Mr. Wilson has been involved in the construction
of most of the world's large diameter hostile environment offshore pipeline
projects. Presently, along with Mr. Wilson's position with Odyssea Marine, Inc.,
he is Chairman of the Board of Grant Geophysical, Inc. and director of Prime
Natural Resources, Inc.

OTHER DIRECTORS AND OFFICERS DURING FISCAL YEAR 1999

Phillip G. Clarke, age 64, served as a Director of the Company from March
1995 through December 1998. Mr. Clarke has worked in the oil and gas industry
for 40 years. He was initially employed by Texaco, Inc. for approximately eight
years, serving in various engineering positions. In 1965, Mr. Clarke was
employed by Placid Oil Company ("Placid") where he accumulated an additional 30
years of diversified experience. In 1977, Mr. Clarke was made Vice President of
Operations for Placid's world-wide activities and held that position until his
retirement in 1995. Following his retirement, Mr. Clarke continued his oil
industry activity by joining several associates in forming Rising Star Energy,
LLC, a Dallas, Texas based independent energy company where he is currently
employed. Mr. Clarke received a B.S. degree in Mechanical Engineering from
Oklahoma State University. Mr. Clarke did not stand for reelection as a director
in December 1998.

Antoine Gautreaux, Jr., age 46, served as a Director of the Company from
October 1996 through August 1998, as Chief Operating Officer of the Company from
July 1996 through August 1998, and as Senior Vice President - Operations from
September 1995 to July 1996. Prior to joining DeepTech, Mr. Gautreaux was
employed by Placid Oil Company ("Placid") for 21 years in various capacities,
including Manager of Drilling and Production. Mr. Gautreaux received a B.S.
degree from Nicholls State University. Mr. Gautreaux resigned his office and
directorship of the Company effective August 14, 1998, in connection with the
Merger.

<PAGE> 33

Edward J. Gibbon, Jr., age 53, served as Vice President - Reservoir
Engineering of the Company from September 1995 through August 1998. Mr. Gibbon
served as Vice President - Reservoir Engineering of Deepwater Production
Systems, Inc. ("Deepwater Systems"), an affiliate of the Company, from September
1993 through August 1998. Prior thereto, Mr. Gibbon served as the President of
IDM Engineering, Inc., a company he founded, which specialized in reservoir
engineering studies and economic evaluations. Mr. Gibbon received a degree in
Petroleum Engineering from the Colorado School of Mines. Mr. Gibbon resigned his
office with the Company effective August 14, 1998 in connection with the Merger.

Eric Lynn Hill, age 53, served as a Director of the Company from
November 1997 through August 1998. From January 1997 to January 1998, Mr. Hill
served as Chief Financial Officer and Secretary of the Company. Since January
1998, Mr. Hill has served as Vice President of Finance and Administration of
Seagull Egypt Ltd. Prior to joining DeepTech, Mr. Hill served as Senior Vice
President - Finance, Administration and Secretary - Treasurer of Global Natural
Resources, Inc. from July 1988 to March 1997. Mr. Hill has over 28 years of
experience in finance and auditing in energy related companies and in public
accounting. Mr. Hill received a B.B.A. degree from the University of North Texas
and is a certified public accountant. Mr. Hill resigned his directorship of the
Company effective August 14, 1998, in connection with the Merger.

Jeffrey K. Lucas, age 43, served as Vice President - Land Manager of the
Company from June 1991 through August 1998. Mr. Lucas has worked in the oil
industry for 18 years. Prior to joining the Company, Mr. Lucas served in various
capacities, including Division Landman, in the Land Department of Tenneco Oil
from 1979 to 1989 and was primarily responsible for negotiating lease
acquisitions in the Rocky Mountain area and the Gulf. Mr. Lucas received a B.S.
in Mineral Land Management from the University of Colorado. Mr. Lucas resigned
his office with the Company effective August 14, 1998 in connection with the
Merger.

Edward L. Moses, Jr., age 63, served as Senior Vice President - Engineering
and Production of DeepTech from 1992 through August 1998, as Managing Director
and a Director of Deepwater Systems from August 1993 through August 1998, and as
a Director of the Company from November 1997 through August 1998. From 1991 to
1992, he served as Senior Vice President and a Director of the Company. From
1989 to 1991, Mr. Moses served as Vice President - Engineering of the Company.
Mr. Moses has worked for over 30 years in the oil and gas industry. Prior to
joining DeepTech, he worked for 12 years as an independent consultant in the oil
and gas industry. Prior thereto, he spent 18 years working for Superior Oil
Company where he served as Manager of International Drilling Operations. Mr.
Moses has a B.S. in Petroleum Engineering from Texas A&M University. Mr. Moses
resigned his office and directorship of the Company effective August 14, 1998,
in connection with the Merger.

Clyde E. Nath, age 65, served as a Director of the Company from March 1995
through December 1998. Mr. Nath worked in the oil and gas industry for 40 years
with Kerr-McGee Corp., holding various positions in Kerr-McGee's Exploration and
Production Division throughout his career. From 1985 until his retirement in
December 1994, Mr. Nath was Vice President of Exploration for the Gulf of Mexico
Region of Kerr-McGee's Exploration and Production Division. Mr. Nath holds a
Bachelor's degree in Geology from Oklahoma City University. He is a member of
the American Association of Petroleum Geologists, the Houston Geological Society
and American Petroleum Institute. Mr. Nath did not stand for reelection as a
director in December 1998.

Jonathan D. Pollock, age 36, is a Portfolio Manager of Stonington
Management Corp. which performs administrative services for Elliott Associates,
L.P. and Westgate International, L.P. Mr. Pollock is responsible for the firm's
oil and gas investments and has served as a Director of the Company from October
1996 through December 1998. Mr. Pollock has been with Stonington Management
Corp. since 1989. Prior to joining Stonington Management Corp., Mr. Pollock was
employed by Greenleaf Partners, an investment banking firm. Mr. Pollock has
served as a director of Horizon Offshore, Inc. since June 1997, and of Grant
Geophysical, Inc. since September 1997. Elliott Associates, L.P. and Westgate
International, L.P. are each deemed to beneficially own more than 5% of the
Common Stock of the Company. See "--Security Ownership of Certain Beneficial
Owners and Management." Stonington Management Corp. is under common control with
Manchester Securities Corp. which is a NASD member broker-dealer. Mr. Pollock
did not stand for reelection as a director in December 1998.

<PAGE> 34

Diana J. Walters, age 36, served as a Director of the Company from
September 1995 through December 1998. Ms. Walters is a Vice President of
Donaldson, Lufkin & Jenrette Securities Corporation in their metals and mining
group and is a NASD broker dealer. Prior to joining DLJ, Ms. Walters served as a
Vice President of PaineWebber, Inc. in their energy group from December 1996
through February 1999. Prior to joining PaineWebber, Ms. Walters served as Vice
President - Corporate Finance and Planning of Tatham Offshore from October 1993
through September 1995 and as Chief Financial Officer of Tatham Offshore from
September 1995 through November 1996. Prior to joining Tatham Offshore, she
served as a Vice President in the Natural Resources Group of Internationale
Nederlanden Bank (ING Bank) from 1990 to 1993 financing independent oil and gas
companies and as an Assistant Vice President in the Natural Resources Department
at The Chase Manhattan Bank (formerly Manufacturers Hanover Trust Company) from
1986 to 1990 financing interstate and intrastate pipeline companies. Ms. Walters
received a B.A. degree and an M.A. degree in Energy and Mineral Resources from
the University of Texas at Austin. Ms. Walters did not stand for reelection as a
director in December 1998.

SUMMARY COMPENSATION TABLE

Through August 14, 1998, the executive officers of the Company were
compensated by DeepTech and did not receive compensation from the Company for
their services as such. Accordingly, DeepTech provided these personnel and other
resources to the Company pursuant to a management agreement during that period.
Effective August 14, 1998, DeepTech was acquired by an affiliate of El Paso
Natural Gas Company and divested all equity ownership in Tatham Offshore through
a rights offering. Under the management agreement, the Company was charged an
annual management fee in exchange for operational, financial, accounting and
administrative services. The management fee was intended to reimburse DeepTech
for the estimated costs of the services provided to each affiliate. The
management agreement was amended effective July 1, 1997 to provide for an annual
management fee equal to 26% of DeepTech's overhead expenses. During the year
ended June 30, 1998, the Company was charged $4,375,000 under its management
agreement. The management agreement between DeepTech and the Company was
terminated in connection with the merger of DeepTech and El Paso. Effective
August 14, 1998, Tatham Offshore hired a management team and support personnel
to implement its business strategy. The Company's executive officer compensation
program is administered and reviewed by the Incentive Plan Compensation
Committee.

The following table sets forth the compensation paid by DeepTech to the
Company's Chief Executive Officer and each of the Company's four other most
highly compensated executive officers for the period July 1, 1998 through August
14, 1998 plus compensation paid by the Company for the period August 15, 1998
through June 30, 1999 (collectively, the "Named Officers"). The compensation set
forth in the table represents amounts paid to the Named Officers for their
services rendered in all capacities to DeepTech and its subsidiaries for the
fiscal years ended June 30, 1998 and 1997 and a portion of the fiscal year ended
June 30, 1999. Therefore, the amounts shown do not reflect amounts earned solely
as compensation for services to the Company. As noted below, in addition to
serving as executive officers of the Company, each of Messrs. Tatham, Fleisher
and Kunetka also served as officers of DeepTech and one or more of its
affiliates for the indicated periods prior to August 14, 1998.

<PAGE> 35

ANNUAL COMPENSATION
---------------------- LONG-TERM
COMPENSATION
NAME/PRINCIPAL OTHER ANNUAL AWARDS ALL OTHER
POSITION WITH FISCAL SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
TATHAM OFFSHORE YEAR ($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Tatham (2) 1999 $ 125,001(3) $ 233,332(3) -- --
Chief Executive Officer 1998 $1,000,000(3) -- $1,400,000(3) -- $ 272,500(5)
1997 $1,000,000(3) -- $1,400,000(3) --(4) --

Dennis A. Kunetka (6) 1999 $ 193,743(7) -- -- 150,000(8) --
Senior Vice President and 1998 $ 161,450(9) -- -- 100,000(13) --
Chief Financial Officer 1997 $ 140,000(9) -- -- -- --

Harvey O. Fleisher (10) 1999 $ 176,250(7) -- -- 150,000(8) --
Senior Vice President - 1998 $ 150,000(9) -- -- -- --
Marine Services 1997 $ 150,000(9) -- -- -- --

Phillip German (11) 1999 $ 157,500 -- -- 150,000(8) --
Vice President - 1998 -- -- -- -- --
Engineering 1997 -- -- -- -- --

Kenneth L. Hamilton (12) 1999 $ 146,874(7) -- -- 150,000(8) --
Vice President - Treasurer 1998 $ 151,038(9) -- -- -- --
and Assistant Secretary 1997 -- -- -- -- --
</TABLE>

- ----------------------

(1) Other Annual Compensation excludes the aggregate value of perquisites
when such value is less than the lesser of $50,000 or 10% of total
annual Salary and Bonus for each Named Officer.

(2) Mr. Tatham also served as Chairman of the Board and Chief Executive
Officer of DeepTech and Chairman of the Board of Leviathan until August
14, 1998.

(3) Effective July 1, 1996, the Compensation Committee of DeepTech's Board
of Directors established a compensation plan for Mr. Tatham for the
years ended June 30, 1997 and 1998. Under the compensation plan, Mr.
Tatham received a base salary of $1,000,000 per annum plus $1,400,000
per annum to be credited against incentive bonuses as they are earned.
The base salary and bonus are payable at the rate of $200,000 per
month. The Compensation Committee of DeepTech's Board of Directors
detailed certain performance goals for DeepTech and its subsidiaries
and affiliates, including the Company, and Mr. Tatham which would allow
him to earn the incentive bonus payments over the two year period. Mr.
Tatham has not received a salary or bonus from the Company since August
14, 1998, the effective date of the Merger and related transactions.

(4) Excludes options to acquire 1,100,000 shares of DeepTech common stock
that were granted to Mr. Tatham during the fiscal year ended June 30,
1997 related to matters other than for executive compensation and
unrelated to the operations of DeepTech or the Company.

(5) Represents the excess of the fair market value of DeepTech options over
the exercise price on the date such options were exercised.

(6) Mr. Kunetka also served as Senior Vice President - Corporate Finance
and Investor Relations for DeepTech and Leviathan until August 14,
1998.

(7) Includes amounts paid by DeepTech from July 1, 1998 through August 14,
1998 and amounts paid by the Company from August 15, 1998 through June
30, 1999.

(8) Includes an option to purchase 100,000 shares of Common Stock and the
grant of 50,000 shares of restricted Series A 12% Cumulative
Convertible Preferred Stock under Tatham Offshore's Incentive Plan.

(9) Amounts paid by DeepTech.

(10) Mr. Fleisher also served as Executive Vice President of DeepFlex
Production Services.

(11) Mr. German joined the Company on August 15, 1999.

(12) Mr. Hamilton served as Corporate Tax Director of DeepTech from August
1997 to August 14, 1998.

(13) Options granted under Tatham Offshore's Incentive Plan to purchase
Common Stock.

<PAGE> 36

The following table sets forth certain information detailing option
grants made to the Named Officers under the Incentive Plan with respect to
shares of Tatham Offshore Common Stock during the fiscal year ended June 30,
1999. Each of the options listed below were issued pursuant to the Company's
Incentive Plan.

NUMBER OF SHARES OF
TATHAM OFFSHORE PERCENT OF POTENTIAL REALIZABLE VALUE AT
COMMON STOCK TOTAL OPTIONS EXERCISE OR ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS GRANTED IN BASE PRICE EXPIRATION STOCK PRICE APPRECIATION FOR
NAME GRANTED FISCAL YEAR ($/SHARE) DATE OPTION TERM
5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Dennis A. Kunetka 100,000 16.67% $0.40625 12/31/05 $16,538 $38,542
Harvey O. Fleisher 100,000 16.67% $0.40625 12/31/05 $16,538 $38,542
Phillip German 100,000 16.67% $0.40625 12/31/05 $16,538 $38,542
Kenneth L. Hamilton 100,000 16.67% $0.40625 12/31/05 $16,538 $38,542
</TABLE>

OPTION EXERCISES AND YEAR-END VALUE TABLES

The following table sets forth certain information regarding the outstanding
options and warrants to purchase Tatham Offshore Common Stock held by the Named
Officers at June 30, 1999.

NUMBER OF VALUE OF UNEXERCISED
VALUE UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED ON REALIZED ($) AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)
NAME EXERCISE (#) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
Thomas P. Tatham -- -- __ / __ -- /--

Dennis A. Kunetka -- -- 25,000 / 75,000(1) -- /--
100,000(2)

Harvey O. Fleisher -- -- -- /100,000(2) -- /--

Philip German -- -- -- /100,000(2) -- /--

Kenneth L. Hamilton -- -- -- /100,000(2) -- /--
</TABLE>

- -----------------

(1) Options granted pursuant to Tatham Offshore's Incentive Plan on January 15,
1998 which vest 25% each year beginning January 15, 1999.

(2) Options granted pursuant to Tatham Offshore's Incentive Plan on December
31, 1998 which vest 33-1/3% each year beginning December 31, 2001.

REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors determines the
compensation of the executive officers named in the Summary Compensation Table.
The Compensation Committee has furnished the following report on executive
compensation.

COMPENSATION PHILOSOPHY

As members of the Compensation Committee, it is our duty to administer the
executive compensation program for the Company. The Compensation Committee is
responsible for establishing appropriate compensation goals for the executive
officers of the Company, evaluating the performance of such executive officers
in meeting such goals and making recommendations to the Board of Directors with
regard to executive compensation.

<PAGE> 37

The Company's compensation philosophy is to ensure that executive
compensation be directly linked to continuous improvements in corporate
performance, achievement of specific operations, financial and strategic
objectives and increases in stockholder value. The Compensation Committee
regularly reviews the compensation packages of the Company's executive officers,
taking into account factors which it considers relevant, such as business
conditions within and outside the industry, the Company's financial performance,
the market composition for executives of similar background and experience and
the performance of the executive officer under consideration. The particular
elements of the Company's compensation programs for executive officers are
described below.

COMPENSATION STRUCTURE

The executive base compensation for the executive officers of the Company
named in the Summary Compensation Table is intended to be competitive with that
paid in comparable situated industries, taking into account the scope of
responsibilities and internal relationships. The goals of the Compensation
Committee in establishing the Company's executive compensation program are:

(1) To fairly compensate the executive officers of the Company and its
subsidiaries for their contributions to the Company's short-term and
long-term performance. The elements of the Company's executive
compensation program are (a) annual base salaries, (b) annual bonuses
and (c) equity incentives.

(2) To allow the Company to attract, motivate and retain the management
personnel necessary to the Company's success by providing an
executive compensation program comparable to that offered by
companies with which the Company competes for management personnel.

Individual's base salaries are determined by the Compensation Committee
based on the scope of the executive's responsibilities, a subjective evaluation
of the executive's performance and the length of time the executive has been in
the position.

EXECUTIVE COMPENSATION DEDUCTIBILITY

It is the Company's intent that amounts paid pursuant to the Company's
compensation plans will generally be deductible compensation expenses. The
Compensation Committee does not currently anticipate that the amount of
compensation paid to executive officers will exceed the amounts specified as
deductible pursuant to Section 162(m) of the Internal Revenue Code of 1986, as
amended.

COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS

James G. Niven
Roger B. Vincent

INCENTIVE PLAN

In 1995, Tatham Offshore adopted the Incentive Plan. The Incentive Plan was
effected to provide Tatham Offshore with the ability of making a variety of
awards pursuant to the Incentive Plan including stock options, restricted stock
and stock value equivalent awards.

Under the Incentive Plan, Tatham Offshore may grant to employees,
consultants or agents of Tatham Offshore or any of its parents or subsidiaries
one or more options (each, a "Stock Option") to purchase shares of Common Stock
as hereinafter set forth. Stock Options granted under the Incentive Plan may be
either incentive stock options ("Incentive Stock Options") within the meaning of
Section 422(b) of the Code, or options that do not qualify as Incentive Stock
Options ("Non-Qualified Stock Options"). Pursuant to the Incentive Plan, Tatham
Offshore may grant awards of Common Stock subject to restrictions on sale or
other disposition of such shares ("Restricted Stock Grant"), and such other
requirements as the Compensation Committee deems appropriate including the
requirement that such shares be forfeited upon termination of employment for
certain reasons within a specified period of time. Pursuant to the Incentive
Plan, Tatham Offshore may also grant rights to

<PAGE> 38

receive an amount equal to the fair market value of shares of Common Stock or
rights to receive an amount equal to any appreciation or increase in the fair
market value of Common Stock over a specified period of time (SARs). Stock
Options, Restricted Stock Grants and SARs are referred to collectively herein as
"Awards."

Except with respect to outstanding Awards, and unless sooner terminated by
action of Tatham Offshore's Board of Directors or the committee thereof charged
with administration of the Incentive Plan, the Incentive Plan will terminate on
December 31, 2005. The maximum number of shares of Common Stock with respect to
which Awards may be granted under the Incentive Plan is 4,000,000.

The Board of Directors may terminate or suspend the Incentive Plan (or any
portion thereof) at any time with respect to any shares for which Awards have
not previously been granted and remain outstanding. The Board of Directors has
the right to alter or amend the Incentive Plan or any part thereof from time to
time; provided, however, that no change in any Award theretofore granted may be
made which would materially adversely affect the rights and obligations of the
holder of any such Award without the written consent of such Incentive Plan
participant; and provided, further, that the Board of Directors may not, without
stockholder approval as required under the Incentive Plan, (i) materially
increase the number of shares of Common Stock which may be issued under the
Incentive Plan (other than in connection with adjustments permitted by the
Incentive Plan), (ii) materially modify the requirements as to eligibility for
participation in the Incentive Plan, (iii) materially increase the benefits
accruing to participants under the Incentive Plan, or (iv) extend the
termination date of the Incentive Plan. In addition, no amendment, suspension or
termination can be adopted which would disqualify the Incentive Plan from (i)
the exemption provided by Rule 16b-3, promulgated under the Exchange Act, or any
successor rule or regulation to such Rule 16b-3, as such rule is applicable from
time to time, or (ii) the benefits provided under Section 422 of the Code, or
any successor thereto.

The Incentive Plan is not subject to any provisions of the Employee
Retirement Income Security Act of 1974, as amended, or the qualification
requirements of Section 401 of the Code.

The Incentive Plan is to be administered by the Compensation Committee.
Each member of the Compensation Committee is a disinterested person within the
meaning of Rule 16b-3 of the Exchange Act and qualifies as an "outside
director", as such term is used for the purposes of Section 162(m) of the Code
and any rules and regulations promulgated thereunder.

Subject to the provisions of the Incentive Plan, the Compensation Committee
has sole authority to select the individuals who are to be granted Awards from
among those persons who are eligible and to determine the restrictions, terms
and conditions of each Award granted under the Incentive Plan (subject to the
terms of the Incentive Plan). The Compensation Committee is authorized to
interpret the Incentive Plan and may, from time to time, adopt, amend or rescind
rules and regulations relating to the implementation, administration and
maintenance of the Incentive Plan.

A total of 702,500 Awards issued pursuant to the Incentive Plan are
currently outstanding.

DIRECTOR PLAN

In 1995, Tatham Offshore adopted the Director Plan. The purpose of the
Director Plan is to allow Tatham Offshore to attract the best available
individuals to serve as outside directors of Tatham Offshore.

All non-employee directors of Tatham Offshore are eligible to participate
in the Director Plan. The Director Plan provides for both automatic one time
grants of Stock Options to Tatham Offshore's non-employee directors and for the
issuance and exercise of Stock Options in lieu of standard cash director
compensation upon the election of non-employee directors. All Stock Options
granted under the Director Plan are Non-Qualified Stock Options.

Except with respect to outstanding Stock Options, and unless sooner
terminated by action of the Board of Directors, the Director Plan will terminate
on December 31, 2005. The maximum number of shares of Common

<PAGE> 39

Stock with respect to which Stock Options may be granted under the Director Plan
is 1,000,000, subject to adjustments for stock splits, stock dividends and
certain other changes in capitalization.

Under the Director Plan, grants of Stock Options to purchase 30,000 shares
of Common Stock were automatically made to all non-employee directors of Tatham
Offshore provided that such non-employee directors had not already received
stock options to purchase 30,000 shares of Common Stock in connection with their
service as a director of Tatham Offshore. In addition, after the effective date
of the Director Plan, any newly elected non-employee director will automatically
receive Stock Options to purchase 30,000 shares of Common Stock. The exercise
price for the Stock Options to purchase 30,000 shares of Common Stock will be
100% of the fair market value of the Common Stock on the later to occur of (i)
the effectiveness of the Director Plan, or (ii) the election of a participant as
a Director of Tatham Offshore. The Stock Options issued pursuant to these
provisions can be immediately exercisable and, unless terminated sooner in
accordance with the Director Plan, shall expire on a date which is ten (10)
years after the date of grant of the option.

In connection with his agreement to serve on the Board of Directors, Mr.
Niven was originally granted stock options to purchase 30,000 shares of Common
Stock of Tatham Offshore at $10.00 per share, the initial public offering price.
The stock options vested at the rate of 10,000 per year beginning June 30, 1995
and were subject to shareholder approval. During the year ended June 30, 1996,
these stock options were canceled and Mr. Niven was granted Stock Options to
purchase 30,000 shares of Common Stock at $0.8125 per share pursuant to the
Director Plan which included 10,000 Stock Options, which vested immediately, and
10,000 Stock Options, which vested annually on June 30, 1996 and 1997. In
connection with his appointment to the Board, Mr. Vincent was issued Stock
Options to purchase 30,000 shares of Common Stock at $0.8125 per share pursuant
to the Director Plan. These Stock Options vested at the rate of 10,000 per year
beginning January 31, 1997.

In connection with his election to the Board of Directors in October 1996,
Mr. Pollock was issued Stock Options to purchase 30,000 shares of Common Stock
at $0.8125 per share. In her new role as a non-employee director on the Board of
Directors, in October 1996, Ms. Walters was issued Stock Options to purchase
30,000 shares of Common Stock at $0.8125 per share. The Stock Options issued to
Mr. Pollock and Ms. Walters vest at the rate of 10,000 per year beginning
October 21, 1997. On January 15, 1998, E. Lynn Hill, a director of the Company,
was awarded options to purchase 15,000 shares of Common Stock at $3.00 per share
which vested immediately. Effective with the one-for-ten reverse stock split on
November 13, 1997, each of the then outstanding options issued under the
Director Plan were adjusted to reflect the reverse stock split.

The Board of Directors may terminate or suspend the Director Plan (or any
portion thereof) at any time with respect to any shares for which Stock Options
have not previously been granted and remain outstanding. The Board of Directors
has the right to alter or amend the Director Plan or any part thereof from time
to time; provided, however, that no change in any Stock Option theretofore
granted may be made which would materially adversely affect the rights and
obligations of the holder of any such Stock Option without the written consent
of such Director Plan participant; and provided, further, that the Board of
Directors may not, without stockholder approval as required under the Director
Plan, (i) materially increase the number of shares of Common Stock which may be
issued under the Director Plan (other than in connection with adjustments
permitted by the Director Plan), (ii) materially modify the requirements as to
eligibility for participation in the Director Plan, (iii) materially increase
the benefits accruing to participants under the Director Plan, or (iv) extend
the termination date of the Director Plan. In addition, no amendment, suspension
or termination may be adopted which would disqualify the Director Plan from (i)
the exemption provided by Rule 16b-3, promulgated under the Exchange Act, or any
successor rule or regulation to such Rule 16b-3, as such rule is applicable from
time to time, or (ii) the benefits provided under Section 422 of the Code, or
any successor thereto.

ADDITIONAL DIRECTOR OPTIONS

On December 31, 1998, each of Messrs. Beeney, Niven, Vincent and Wilson,
the current outside directors of the Company, were granted options to purchase
100,000 shares of the Company's Common Stock for $0.40625 per share, the trading
price for the Company's Common Stock on that date. The options vest 33-1/3% each
year beginning December 31, 1999.

<PAGE> 40

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of August 31, 1999 the beneficial
ownership of the outstanding Common Stock of Tatham Offshore by (i) each person
who is known to Tatham Offshore to beneficially own more than 5% of the
outstanding Common Stock of Tatham Offshore, (ii) each director and director
nominee of Tatham Offshore, (iii) each executive officer named in the Summary
Compensation Table (see "Executive Compensation") and (iv) all executive
officers and directors of Tatham Offshore as a group.

<TABLE>
<CAPTION>
SHARES OF CLASS BENEFICIALLY OWNED(1)
-------------------------------------
TATHAM OFFSHORE
COMMON STOCK(2)
---------------

NUMBER PERCENT
------ -------
<S> <C> <C>
Kenneth E. Beeney ........................... 8,500 *
Harvey O. Fleisher .......................... 25,620(3) *
Phillip German .............................. 15,620(3) *
Kenneth L. Hamilton ......................... 15,929(3) *
Dennis A. Kunetka ........................... 41,870(4) *
James G. Niven .............................. 9,378(5) *
Thomas P. Tatham ............................ 665,010(6) 2.5%
7500 Chase Tower
Houston, Texas 77002 ......................
Roger B. Vincent, Sr ........................ 3,412(7) *
Don W. Wilson ............................... 22,500 *
Tatham Brothers Securities, LLC ............. 21,847,492(8) 80.5%
7500 Chase Tower
Houston, Texas 77002 ......................
Elliott Associates, L.P. .................... 1,886,204(9) 6.8%
712 5th Avenue, 36th Floor
New York, New York 10019 ..................
Martley International, L.P. ................. 1,886,204(9) 6.8%
1086 Teaneck Road
Teaneck, New Jersey 07666 .................
Westgate International, L.P. ................ 1,886,204(9) 6.8%
c/o Midland Bank Trust
Corporation (Cayman) Limited
P.O. Box 1109, Mary Street
Grand Cayman, Cayman Islands
British West Indies
Lehman Commercial Paper, Inc. ............... 1,467,660(10) 5.6%
3 World Financial Center
9th Floor
New York, New York 10285 ..................
Executive officers and directors ............ 817,212(11) 3.0%
as a group (10 persons)

</TABLE>

----------------
*Less than 1%.

(1) Shares of Common Stock that are not outstanding but that may be
acquired by a person upon exercise of options or warrants within 60
days of the above date are deemed outstanding for the purpose of
computing the percentage of outstanding shares beneficially owned by
such person. However, such shares are not deemed to be outstanding for
the purpose of computing the percentage of outstanding shares
beneficially owned by any other person.

38
<PAGE> 41

(2) Shares of Series A 12% Convertible Exchangeable Preferred Stock
("Series A Preferred Stock"), Series B 8% Convertible Exchangeable
Preferred Stock ("Series B Preferred Stock") and Series C 4%
Convertible Exchangeable Preferred Stock ("Series C Preferred Stock")
held by each named person are assumed converted into shares of Common
Stock for the purpose of computing the number of shares of Common Stock
beneficially owned by such person. See "--Certain Relationships and
Related Transactions--Convertible Exchangeable Preferred Stock."

(3) Includes 15,620 shares of Common Stock assumed acquired as a result of
conversion of 50,000 shares of Series A Preferred Stock into Common
Stock.

(4) Includes options to purchase 25,000 shares of Common Stock. Also
includes 15,620 shares of Common Stock assumed acquired as a result of
conversion of 50,000 shares of Series A Preferred Stock into Common
Stock.

(5) Includes options to purchase 3,000 shares of Common Stock.

(6) Includes 480,346 shares assumed acquired as a result of conversion of
1,537,600 shares of Series A Preferred Stock into Common Stock. Also
includes 1,768 shares assumed acquired as a result of conversion of
21,000 shares of Series C Preferred Stock into Common Stock. Mr. Tatham
owns 8.9% of the Series A Preferred Stock outstanding.

(7) Includes 312 shares assumed acquired as a result of conversion of 1,000
shares of Series A Preferred Stock into Common Stock. Also includes
options to purchase 3,000 shares of Common Stock.

(8) Includes 1,079,481 shares of Common Stock assumed acquired as a result
of conversion of 3,455,444 shares of Series A Preferred Stock. Tatham
Brothers Securities, LLC owns 20.1% of the Series A Preferred Stock
outstanding.

(9) The total number of shares credited to each of Elliott Associates, a
Delaware limited partnership, Westgate International, L.P., a Cayman
Islands Limited Partnership ("Westgate") and Martley International,
Inc., a Delaware corporation ("Martley") as beneficial ownership
interest includes (a) 1,620,664 shares beneficially owned by Elliott
Associates ("Elliott Shares") and (b) 265,540 shares beneficially owned
by Westgate ("Westgate Shares"). The Westgate Shares are credited to
Martley because Westgate and Martley share the power to vote, direct
the vote of, and to dispose or direct the disposition of the Westgate
Shares. The Westgate Shares are credited to Elliott Associates, the
Elliott Shares credited to Westgate, and the Elliott Shares credited to
Martley as a result of Elliott Associates, Martley and Westgate's
actions as a shareholder group under Rule 13D-3 of the Exchange Act.
The Elliott Shares include 1,620,664 shares that may be acquired by
Elliott Associates by conversion of 5,187,784 shares of Series A
Preferred Stock owned by Elliott Associates into Common Stock; the
Westgate Shares include 265,540 shares of Common Stock that may be
acquired by Westgate as a result of the conversion of 850,000 shares of
Series A Preferred Stock owned by Westgate into Common Stock. Each of
Elliott Associates, Westgate and Martley beneficially owns 35.1% of the
Series A Preferred Stock outstanding.

(10) Includes 72,517 share of Common Stock assumed acquired as a result of
conversion of 232,128 shares of Series A Preferred Stock.

(11) Includes 552,511 shares of Common Stock assumed acquired as a result of
conversion of 1,768,600 shares of Series A Preferred Stock. Also
includes 1,768 shares of Common Stock assumed acquired as a result of
conversion of 21,000 shares of Series C Preferred Stock. Also includes
options to purchase 31,000 shares of Common Stock. The executive
officers and directors as a group beneficially own 103% of the Series A
Preferred Stock outstanding.

<PAGE> 42

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

A discussion of certain agreements, arrangements and transactions between
or among the Company, Leviathan, DeepTech and certain other related parties is
summarized in the Company's "Notes to Consolidated Financial Statements -- Note
2 -- DeepTech Merger and Related Transactions", "-- Note 4 -- Property and
Equipment --", "-- Note 5 -- Indebtedness --", "-- Note 7 -- Related Party
Transactions --" and "-- Note 11 -- Subsequent Events" located elsewhere in this
Annual Report.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires Tatham Offshore's officers and
directors, and persons who beneficially own more than 10% of Common Stock ("10%
Stockholders"), to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("the Commission") and the regulations of the
Securities and Exchange Commission require such officers, directors and 10%
Stockholders to furnish the Company with copies of all such reports that they
file. Based solely upon a review of the Forms 3, 4 and 5 and amendments thereto
provided to the Company, and certain written representations furnished to the
Company, the Company believes that, during the fiscal year ended June 30, 1998,
its executive officers, directors and greater than 10% beneficial owners
complied with all applicable filing requirements, except that Tatham Brothers,
LLC and its members failed to timely file a Form 3 in August of 1998 and Mr.
Thomas P. Tatham failed to timely file a Form 4 in August of 1998 to report
their respective acquisitions of beneficial ownership of Company stock on August
18, 1998. To rectify these delinquent filings, Tatham Brothers Securities, LLC,
as the designated filer for a "group," for purposes of Section 13(d) of the
Exchange Act, filed a Form 5 in August of 1999 on behalf of itself and the
delinquent filers listed above.

<PAGE> 43

COMPARATIVE STOCK PERFORMANCE

As required by applicable rules of the Commission, the performance graph
was prepared based upon the following assumptions:

1. $100 was invested in Common Stock, the Standard & Poor's 500 Stock
Index (the "S&P 500 Index") and the Dow Jones Oil -- Secondary Index
(the "Peer Group") on July 1, 1994.

2. Dividends are reinvested on the ex-dividend dates.

COMPARATIVE TOTAL RETURNS

TATHAM OFFSHORE, INC., THE S&P 500 INDEX AND THE PEER
GROUP (PERFORMANCE RESULTS FOR THE FIVE YEAR PERIOD ENDING JUNE 30, 1999)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
01-JUL-94 30-JUN-95 30-JUN-96 30-JUNE-97 30-JUN-98 30-JUN-99
<S> <C> <C> <C> <C> <C> <C>
TATHAM OFFSHORE 100.00 35.00 8.75 5.67 3.00 0.47
---------------------------------------------------------------------------------
S&P 500 INDEX 100.00 126.07 158.85 213.97 278.51 341.88
---------------------------------------------------------------------------------
PEER GROUP 100.00 102.48 118.80 128.29 131.21 120.70
---------------------------------------------------------------------------------
</TABLE>

<PAGE> 44

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Annual Report or
incorporated by reference:

1. Financial Statements

As to financial statements and supplementary information, reference is
made to "Index to Consolidated Financial Statements" on page F-1 of
this Annual Report.

2. Financial Statement Schedules

None. All financial statement schedules are omitted because the
information is not required, is not material or is otherwise included
in the consolidated financial statements or notes thereto included
elsewhere in this Annual Report.

3. (a) Exhibits

Exhibit
Number Description

3.1 Restated Certificate of Incorporation of Tatham Offshore
(filed as exhibit 3.1 in Tatham Offshore's Annual Report
on Form 10-K for the fiscal year ended June 30, 1994,
and incorporated herein by reference).

3.2 By-laws of Tatham Offshore (filed as exhibit 3.2 in
Tatham Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein
by reference).

3.3 Certificate of Amendment of Certificate of Incorporation
of Tatham Offshore (filed as Exhibit 3.1 to Tatham
Offshore's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996, Commission File No. 0-22892 and
incorporated herein by reference).

3.4 Certificate of Amendment of Certificate of Incorporation
of Tatham Offshore (filed as Exhibit 3.2 to Tatham
Offshore's Registration Statement on Form S-1 Commission
File No.
333-49859 and incorporated herein by reference).

4.1 Certificate of Designation Establishing the Series A
Convertible Exchangeable Preferred Stock of Tatham
Offshore (filed as Exhibit 4.1 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995, Commission File No. 0-22892 and
incorporated herein by reference).

4.2 Certificate of Designation Establishing the Series B
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.2 to Tatham Offshore's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995,
Commission File No. 0-22892 and incorporated herein by
reference).

4.3 Certificate of Designation Establishing the Series C
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.3 to Tatham Offshore's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995,
Commission File No. 0-22892 and incorporated herein by
reference).

4.4 Certificate of Designation Establishing the Mandatory
Redeemable Preferred Stock (filed as Exhibit 4.4 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).

4.5 Certificate of Designation Establishing the Series B
Convertible Preferred Stock (filed as Exhibit 4.1 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, Commission File No.
0-22892 and incorporated herein by reference).

<PAGE> 45

4.6 Warrant Agreement relating to the warrants entitling the
holder thereof to purchase shares of Convertible
Exchangeable Preferred Stock (filed as Exhibit 4.5 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).

4.7 Exchange Warrant Agreement relating to the warrants
entitling the holder thereof to purchase shares of
Tatham Offshore's Common Stock (filed as Exhibit 4.6 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).

10.1 Registration Rights Agreement dated March 21, 1994,
between Tatham Offshore and First Interstate Bank of
Texas, N.A., as Trustee (filed as Exhibit 10.17 to
DeepTech's Registration Statement on Form S-1,
Commission File No. 33-76999, and incorporated herein by
reference).

10.2 Farmout Agreement, dated October 1, 1994, between Tatham
Offshore, F-W Oil Interests, Inc., O.P.I. International,
Inc., and J. Ray McDermott Properties, Inc. (filed as
Exhibit 10.48 to DeepTech's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995, Commission File
No. 0-23934 and incorporated herein by reference).

10.3 Agreement dated July 2, 1993 and amended on December 6,
1993 between Fina Oil and Chemical Company and Petrofina
Delaware, Incorporated and Tatham Offshore covering
Viosca Knoll Blocks 772/773, 774, 817, 818 and 861
(filed as Exhibit 10.20 to Tatham Offshore's
Registration Statement on Form S-1, Commission File No.
33-70120, and incorporated herein by reference).

10.4 Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Ewing Bank
Blocks 871, 914, 915, 916, 958 and 959, Ewing Bank Area,
Offshore Louisiana, dated May 13, 1988 by and among
Mobil-X, Sohio, Kerr-McGee and Kerr-McGee Federal
Limited Partnership I-1981 (filed as Exhibit 10.22 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).

10.5 Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Viosca
Knoll Blocks 772, 773, 774, 817, 818 and 861, Viosca
Knoll Area Offshore Louisiana, dated July 7, 1993 by and
among Tatham Offshore, Petrofina Delaware, Incorporated
and Fina Oil & Chemical Company (filed as Exhibit 10.23
to Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).

10.6 DeepTech Registration Rights Agreement by and between
Tatham Offshore and DeepTech (filed as Exhibit 10.25 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).

10.7 Indemnification Agreement dated as of October 16, 1993
between Tatham Offshore and its directors (filed as
Exhibit 10.26 to Tatham Offshore's Registration
Statement on Form S-1, Commission File No. 33-70120, and
incorporated herein by reference).

10.8 Subordinated Convertible Note Purchase Agreement between
Tatham Offshore and DeepTech, as amended (filed as
exhibit 10.30 in Tatham Offshore's Annual Report on Form
10-K for the fiscal year ended June 30, 1994, and
incorporated herein by reference).

10.9 11 3/4% Subordinated Convertible Promissory Note made
payable by the Company to the order oF the holder
thereof (filed as exhibit 10.31 in Tatham Offshore's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1994, and incorporated herein by reference).

10.10 Form of Stock Option Agreement by and between the
Optionee and Tatham Offshore (filed as exhibit 10.35 in
Tatham Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein
by reference).

<PAGE> 46

10.11 Agreement for Purchase and Sale by and between Tatham
Offshore, Inc., as Seller, and Flextrend Development
Company, L.L.C., as Buyer, dated June 30, 1995 (filed as
Exhibit 6(a) to the Leviathan Gas Pipeline Partners,
L.P. Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, Commission File Number 1-11680 and
incorporated herein by reference).

10.12 Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of F-W Oil Interests,
Inc. (filed as Exhibit 10.91 to DeepTech's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995,
Commission File No. 0-23934 and incorporated herein by
reference).

10.13 Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of J. Ray McDermott
Properties, Inc. (filed as Exhibit 10.92 to DeepTech's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1995, Commission File No. 0-23934 and
incorporated herein by reference).

10.14 Tatham Offshore, Inc. Employee Equity Incentive Plan
(filed as Exhibit 10.47 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1995, and incorporated herein by reference).

10.15 Tatham Offshore, Inc. Non-Employee Director Stock Option
Plan (filed as Exhibit 10.48 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1995, and incorporated herein by reference).

10.16 Master Drilling Agreement and Drilling Order between
Tatham Offshore, Inc. and Sedco Forex Division,
Schlumberger Technology Corporation dated September 19,
1996 (filed as Exhibit 10.50 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1996, and incorporated herein by reference).

10.17 Redemption Agreement dated February 27, 1998 between
Tatham Offshore, Inc. and Flextrend Development Company,
L.L.C.(filed as Exhibit 10.1 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, Commission File No. 0-22892 and
incorporated herein by reference).

10.18 Purchase Commitment Agreement dated February 27, 1998 by
and between Tatham Offshore, Inc. and Tatham Brothers,
LLC (filed as Exhibit 10.2 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, Commission File No. 0-22892 and
incorporated herein by reference).

10.19 Master Agreement, dated as of November 29, 1995, by and
among Highwood Partners, L.P., DeepTech International
Inc., DeepFlex Production Services, Inc., FPS III, Inc.
and Deepwater Drillers, L.L.C. (filed as Exhibit 10.1 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).

10.20 Limited Liability Company Agreement of Deepwater
Drillers, L.L.C. (filed as Exhibit 10.2 to DeepTech's
Current Report on Form 8-K dated May 2, 1996 and
incorporated herein by reference).

10.21 First Amended and Restated Drilling Make-Ready Agreement
dated November 29, 1996 between RIGCO North America,
L.L.C. and Schlumberger Technology Corporation (Sedco
Forex Division) (filed as Exhibit 10.1 to DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File No. 0-23934 and
incorporated herein by reference).

10.22 Contribution and Distribution Agreement dated February
27, 1998, between DeepTech International Inc., Tatham
Offshore, Inc., DeepFlex Production Services, Inc., and
El Paso Natural Gas Company (filed as Exhibit 10.26 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein by
reference).

<PAGE> 47

10.23 Standby Agreement dated February 27, 1998, between
DeepTech International Inc., Tatham Offshore, Inc.,
Thomas P. Tatham, Tatham Brothers, LLC, and El Paso
Natural Gas Company (filed as Exhibit 10.27 to Tatham
Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein by
reference).

10.24 Form of Tax Sharing Agreement among Tatham Offshore,
Inc., DeepTech International Inc. and DeepFlex
Production Services, Inc. (filed as Exhibit 10.28 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein
by reference).

10.25 First Amended and Restated Charter between RIGCO North
America, L.L.C. and Sedco Forex Division, Schlumberger
Technology Corporation dated November 29, 1996 (filed as
Exhibit 10.25 to Tatham Offshore's Annual Report on Form
10-K for the fiscal year ended June 30, 1998, and
incorporated herein by reference).

10.26 Second Amended and Restated Charter between RIGCO North
America, L.L.C. and Sedco Forex Division, Schlumberger
Technology Corporation dated August 14, 1997 (filed as
Exhibit 10.26 to Tatham Offshore's Annual Report on Form
10-K for the fiscal year ended June 30, 1998, and
incorporated herein by reference).

10.27 Credit Agreement, dated September 30, 1996 among RIGCO
North America, L.L.C., Lehman Commercial Paper, Inc., as
Advisor, Syndication Agent, Arranger, Collateral and
Documentation Agent and Administrative Agent, and the
banks and other financial institutions from time to time
party thereto (filed as Exhibit 10.3 to DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File Number 0-23934 and
incorporated herein by reference).

10.28 Global Amendment and Assignment and Acceptance dated
October 9, 1996 to the Credit Agreement among RIGCO
North America, L.L.C., Lehman Commercial Paper, Inc., as
Advisor, Syndication Agent and Arranger, Hibernia
National Bank, as Collateral and Documentation Agent and
BHF-Bank Aktrengesellschaft, as Administrative Agent.
(filed as Exhibit 10.28 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1998, and incorporated herein by reference).

10.29 Second Amendment dated as of April 23, 1997 to the
Credit Agreement among RIGCO North America, L.L.C.,
Lehman Commercial Paper, Inc., as Advisor, Syndication
Agent and Arranger, Hibernia National Bank, as
Collateral and Documentation Agent and BHF-Bank
Aktiengesellschaft, as Administrative Agent (filed as
Exhibit 10.40 to DeepTech's Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1997, Commission File
No. 0-23934 and incorporated herein by reference).

10.30 Third Amendment dated May 13, 1997 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent (filed as Exhibit 10.30 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, and incorporated herein by
reference).

10.31 Fourth Amendment dated July 31, 1997 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent (filed as Exhibit 10.31 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, and incorporated herein by
reference).

<PAGE> 48

10.32 Fifth Amendment dated June 16, 1998 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent (filed as Exhibit 10.32 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, and incorporated herein by
reference).

10.33 Sixth Amendment dated September 25, 1998 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent (filed as Exhibit 10.33 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, and incorporated herein by
reference).

10.34 Management Agreement dated June 16, 1998 between
DeepFlex Production Services, Inc. and RIGCO North
America, L.L.C. (filed as Exhibit 10.34 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, and incorporated herein by
reference).

10.35 Restructuring Agreement dated September 22, 1997,
between DeepTech and Tatham Offshore (filed as Exhibit
10.35 to Tatham Offshore's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998, and
incorporated herein by reference).

10.36 Amended and Restated Management Agreement, effective as
of July 1, 1992, between DeepTech and Tatham Offshore
(filed as Exhibit 10.1 to Amendment No. 4 to Tatham
Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference.)

10.37 First Amendment to Amended and Restated Management
Agreement, dated as of January 1, 1995, between DeepTech
and Tatham Offshore (filed as Exhibit 10.71 to
DeepTech's Registration Statement on Form S-1,
Commission File No. 33-88688, and incorporated herein by
reference).

10.38 Fourth Amendment to First Amended and Restated
Management Agreement dated as of May 1, 1997 between
DeepTech and Tatham Offshore (filed as Exhibit 10.6 to
DeepTech's Annual Report on Form 10-K/A for the fiscal
year ended June 30, 1997, Commission File No.
0-23934, and incorporated herein by reference).

10.39 Letter Agreement dated March 22, 1995 between Tatham
Offshore and Ewing Bank Gathering Company, L.L.C.
amending the Gathering Agreement dated July 1, 1992
(filed as Exhibit 10.44 to DeepTech's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995,
Commission File No. 0-23934 and incorporated herein by
reference).

10.40 Gas Purchase Agreement dated July 26, 1993 between
Offshore Marketing and Tatham Offshore (filed as Exhibit
10.17 to Tatham Offshore's Registration Statement on
Form S-1, Commission File No. 33-70120, and incorporated
herein by reference).

10.41 Condensate Purchase Agreement dated July 26, 1993
between Offshore Marketing and Tatham Offshore (filed as
Exhibit 10.18 to Tatham Offshore's Registration
Statement on Form S-1, Commission File No. 33-70120, and
incorporated herein by reference).

10.42 Credit Agreement, dated as of February 16, 1996 among
DeepFlex Production Services, Inc., Citicorp USA, Inc.,
as Administrative Agent, and the several lenders from
time to time parties thereto (filed as Exhibit 10.3 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).

10.43 Fourth Amendment to Management Agreement between
DeepTech International Inc. and DeepFlex Production
Services, Inc. dated as of May 1, 1997 (filed as Exhibit
10.38 to DeepTech's Annual Report on Form 10-K/A for the
fiscal year ended June 30, 1997, Commission File No.
0-23934 and incorporated herein by reference).

<PAGE> 49
10.44 First Amendment to Management Agreement between RIGCO
North America, L.L.C. and DeepTech dated as of May 1,
1997 (filed as Exhibit 10.39 to DeepTech's Annual Report
on Form 10-K/A for the fiscal year ended June 30, 1997,
Commission File No. 0-23934 and incorporated herein by
reference).

10.45 Promissory Note from Tatham Offshore, Inc. to Tatham
Brothers, LLC for $22,889,102 dated August 14, 1998
(filed as Exhibit 10.45 to Tatham Offshore's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998, Commission File No. 0-22892 and incorporated
herein by reference).

10.46 Promissory Note from Tatham Offshore, Inc. to Tatham
Brothers, LLC in the amount of $24,097,107 dated January
15, 1999 (filed as Exhibit 10.46 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999, Commission File No. 0-22892 and
incorporated herein by reference).

10.47 Convertible Subordinated Note from Tatham Offshore, Inc.
to Tatham Brothers, LLC in the amount of $1,000,000
dated January 15, 1999 (filed as Exhibit 10.47 to Tatham
Offshore's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, Commission File No.
0-22892 and incorporated herein by reference).

10.48* Seventh Amendment dated March 30, 1999 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent.

10.49* Promissory Note from RIGCO North America, L.L.C. to
Tatham Investment Corp. dated June 30, 1999 for the
lesser of (i) $750,000 and (ii) the total unpaid
principal amount of all loans made thereunder, with
interest.

10.50* Revolving Demand Promissory Note from Tatham Offshore,
Inc. to Tatham Investment Corp. dated July 1, 1999 for
the lesser of (i) $5,000,000 and (ii) the aggregate
unpaid principal amount of all loans made thereunder,
with interest.

21.1* List of Subsidiaries of Tatham Offshore, Inc.

23.1* Consent of Independent Accountants,
PricewaterhouseCoopers LLP.

24.1 Powers of Attorney (included on the signature page on
this Annual Report on Form 10-K).

27.1* Financial Data Schedules.
- --------------

* Filed herewith

(b) Reports on Form 8-K

None.

<PAGE> 50

POWERS OF ATTORNEY

Each person whose signature appears below hereby appoints Thomas P. Tatham
and Dennis A. Kunetka and each of them, any one of whom may act without the
joinder of the others, as his attorney-in-fact to sign on his behalf and in the
capacity stated below and to file all amendments to this Annual Report, which
amendment or amendments may make such changes and additions thereto as such
attorney-in-fact may deem necessary or appropriate.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this First Amendment to the
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized.

TATHAM OFFSHORE, INC.
(Registrant)

By: /s/ Thomas P. Tatham
-----------------------------
Thomas P. Tatham
Chairman of the Board
and Chief Executive Officer
September 27, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date(s) indicated.

/s/Thomas P. Tatham /s/ James G. Niven
- ------------------------------------------- -------------------------------
Thomas P. Tatham, Chairman of the Board James G. Niven, Director
and Chief Executive Officer September 27, 1999
September 27, 1999

/s/Dennis A. Kunetka /s/ Roger B. Vincent, Sr.
- ------------------------------------------- -------------------------------
Dennis A. Kunetka, Chief Financial Officer, Roger B. Vincent, Sr., Director
Senior Vice President and Secretary September 27, 1999
(Principal Accounting Officer)
September 27, 1999

/s/Kenneth E. Beeney /s/ Don W. Wilson
- ------------------------------------------- -------------------------------
Kenneth E. Beeney, Director Don W. Wilson, Director
September 27, 1999 September 27, 1999

<PAGE> 51

TATHAM OFFSHORE, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

PAGE
----

<S> <C>
Report of Independent Accountants......................................................... F-2
Consolidated Balance Sheet as of June 30, 1999 and 1998................................... F-3
Consolidated Statement of Operations for the Years Ended
June 30, 1999, 1998 and 1997......................................................... F-4
Consolidated Statement of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997......................................................... F-5
Consolidated Statement of Stockholders' Equity for the Years
Ended June 30, 1999, 1998 and 1997................................................... F-6
Notes to Consolidated Financial Statements................................................ F-7

</TABLE>

F-1
<PAGE> 52

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Tatham Offshore, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Tatham
Offshore, Inc. and its subsidiaries (the Company) at June 30, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1999 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 5 and
11 to the consolidated financial statements, as of April 30, 1999 a wholly-owned
subsidiary of the Company was in default under the terms of its senior secured
credit facility and on August 9, 1999, four wholly-owned subsidiaries of the
Company filed voluntary petitions for relief under Chapter 11, Title 11 of the
United States Bankruptcy Code. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 11. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
September 27, 1999

F-2
<PAGE> 53

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)

<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 486 $ 2,689
Accounts receivable 16,076 2,957
Receivable from affiliates -- 514
Prepaid expenses 168 167
--------- ---------
Total current assets 16,730 6,327
--------- ---------

Property and equipment:
Semisubmersible drilling rigs 146,487 135,754
Oil and gas properties, at cost, using successful efforts method -- 26,762
--------- ---------
146,487 162,516
Less - accumulated depreciation, depletion, amortization and impairment 12,204 27,532
--------- ---------
Property and equipment, net 134,283 134,984
--------- ---------

Restricted cash 170 --
Deferred costs 12,591 11,529
Debt issue costs, net -- 578
--------- ---------
Total assets $ 163,774 $ 153,418
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities $ 10,102 $ 3,812
Accounts payable to affiliates 8,082 11,374
Long-term debt currently payable 58,148 59,156
Long-term debt to affiliate currently payable 26,519 --
--------- ---------
Total current liabilities 102,851 74,342
Other noncurrent liabilities -- 3,416
--------- ---------
102,851 77,758
--------- ---------

Minority interests in consolidated subsidiary -- 250
--------- ---------
Commitments and contingencies (Note 9)

Stockholders' equity (deficit) (Note 6):
Preferred stock, $0.01 par value, 110,000,000 shares authorized
as of June 30, 1999 and 1998, 17,579,717 and
17,960,732 shares issued and outstanding at June 30, 1999
and 1998, respectively 176 180
Common stock, $0.01 par value, 250,000,000 shares authorized
as of June 30, 1999 and 1998, respectively, 26,074,321 and
30,001,026 shares issued and outstanding as of June 30, 1999
and 1998, respectively 261 300
Additional paid-in capital 186,217 192,179
Accumulated deficit (125,731) (117,249)
--------- ---------
60,923 75,410
--------- ---------
Total liabilities and stockholders' equity $ 163,774 $ 153,418
========= =========
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-3

<PAGE> 54

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Revenue:
Drilling services $ 39,846 $ 672 $ --
----------- ---------- -----------
39,846 672 --
----------- ---------- -----------

Costs and expenses:
Drilling operating expenses 22,234 428 --
Depreciation 5,711 91 --
Management fee 155 656 492
General and administrative expenses 6,861 206 235
----------- ---------- -----------
34,961 1,381 727
----------- ---------- -----------

Operating income (loss) 4,885 (709) (727)

Interest and other income 969 223 571
Interest and other financing costs (7,655) -- --
Interest expense and other financing costs - affiliates (6,460) -- --
------------ ---------- -----------

Net loss from continuing operations $ (8,261) $ (486) $ (156)

Discontinued operations (Note 2)
Loss from oil and gas operations (221) (4,325) (47,815)
------------ ---------- -----------

Net loss $ (8,482) $ (4,811) $ (47,971)
------------ ---------- -----------

Preferred stock dividends (3,055) (3,770) (3,920)
------------ ---------- -----------

Net loss allocable to common shareholders $ (11,537) $ (8,581) $ (51,891)
============ ========== ===========

Weighted average number of shares 26,558 17,300 2,665
=========== ========== ===========

Basic and diluted loss per common share
from continuing operations (Note 3) $ (0.43) $ (0.25) $ (1.53)
========== =========== ===========

Basic and diluted loss per common share
from discontinued operations (Note 3) $ (0.00) $ (0.25) $ (17.94)
========== =========== ===========

Basic and diluted loss per common share (Note 3) $ (0.43) $ (0.50) $ (19.47)
========== =========== ===========

</TABLE>

The accompanying notes are an integral part of this financial statement.

F-4
<PAGE> 55

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,482) $ (4,811) $(47,971)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 5,968 3,047 5,364
Impairment, abandonment and other -- -- 41,674
Amortization of debt issue costs 3,079 39 --
Costs and expenses settled by issuance of common stock -- 389 --
Noncash interest expense 3,607 1,709 --
Other -- -- 2,377
Changes in operating working capital (net of effect of conveyance):
(Increase) decrease in accounts receivable (13,119) (668) 518
Decrease (increase) in receivable from affiliates 488 837 (382)
(Increase) decrease in prepaid expenses (1) (116) 29
Increase (decrease) in accounts payable and accrued liabilities 7,046 (3,369) (3,221)
Increase (decrease) in accounts payable to affiliates 3,935 4,819 (2,946)
-------- -------- --------
Net cash provided by (used in) operating activities 2,521 1,876 (4,558)
-------- -------- --------

Cash flows from investing activities:
Additions to oil and gas properties -- (352) (2,923)
Additions to semisubmersible drilling rigs (10,733) -- --
Deferred costs (1,036) (10,212) (1,317)
Cash received from conveyance of DeepFlex to Tatham Offshore -- 3,580 --
Conveyance of oil and gas properties (1,605) -- --
-------- -------- --------
Net cash used in investing activities (13,374) (6,984) (4,240)
-------- -------- --------

Cash flows from financing activities:
Repayment of notes payable (1,008) (250) --
Proceeds from notes payable to affiliate 14,579 -- --
Repayment of notes payable to affiliate (2,250) -- (1,734)
Proceeds from the issuance of common stock related to the
exercise of Exchange Warrants -- 2,656 --
Redemption of Mandatory Redeemable Preferred Stock -- (2,496) --
Increase in restricted cash (170)
Debt issue costs (2,501) -- --
Proceeds from issuance of Series A Preferred Stock -- -- 12,242
Proceeds from issuance of Series B Preferred Stock -- -- 74
Proceeds from issuance of Series C Preferred Stock -- -- 1,339
-------- -------- --------
Net cash provided by (used in) financing activities 8,650 (90) 11,921
-------- -------- --------

Net (decrease) increase in cash and cash equivalents (2,203) (5,198) 3,123
Cash and cash equivalents at beginning of year 2,689 7,887 4,764
-------- -------- --------
Cash and cash equivalents at end of year $ 486 $ 2,689 $ 7,887
======== ======== ========

</TABLE>

Supplemental disclosures to the statement of cash flows - see Note 10.

The accompanying notes are an integral part of this financial statement.

F-5
<PAGE> 56
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Warrants
outstanding
to purchase shares
Preferred Stock Common Stock of Convertible
-------------------- ---------------------- Exchangeable Additional
Number of Number of Preferred paid-in Accumulated
Shares Par value Shares Par value Stock capital deficit Total
--------- ---------- --------- --------- ------------------ -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 18,725 187 25,500 255 2,883 80,004 (64,467) 18,862

Issuance of Series B
Preferred Stock 74 1 -- -- (34) 107 -- 74

Issuance of Series C
Preferred Stock 1,338 13 -- -- (602) 1,928 -- 1,339

Conversion of Warrants into
Mandatory Redeemable
Preferred Stock 4,991 50 -- -- (2,247) 2,197 -- --

Conversion of Series A
Preferred Stock into
Common Stock (784) (8) 1,856 19 -- (11) -- --

Net loss for the year ended
June 30, 1997 -- -- -- -- -- -- (47,971) (47,971)
------ ----- -------- -------- -------- ------- -------- --------

Balance, June 30, 1997 24,344 243 27,356 274 -- 84,225 (112,438) (27,696)

Reverse stock split -- -- (24,620) (246) -- 246 -- --

Conversion of debt into
common stock -- -- 26,667 266 -- 61,443 -- 61,709

Contribution by DeepTech
of all of the outstanding
capital stock of DeepFlex -- -- -- -- -- 59,279 -- 59,279

Conveyance of all of the
outstanding capital stock
of Tatham Development to
DeepTech -- -- -- -- -- (13,620) -- (13,620)

Issuance of common stock -- -- 90 1 -- 388 -- 389

Conversion of Series A
Preferred Stock into
common stock (375) (3) 101 1 -- 2 -- --

Conversion of Series C
Preferred Stock into
Exchange Warrants (1,017) (10) -- -- 1,474 (1,464) -- --

Issuance of common stock
related to the exercise
of Exchange Warrants -- -- 407 4 (1,474) 4,126 -- 2,656

Redemption of Mandatory
Redeemable Preferred
Stock (4,991) (50) -- -- -- (2,446) -- (2,496)

Net loss for the year
ended June 30, 1998 -- -- -- -- -- -- (4,811) (4,811)
------ ----- -------- -------- -------- ------- -------- --------

Balance, June 30, 1998 17,961 180 30,001 300 -- 192,179 (117,249) 75,410

Merger related transactions
(Note 2) (661) (7) (3,927) (39) -- (6,235) -- (6,281)

Expiration of minority
interest in consolidated
subsidiary -- -- -- -- -- 250 -- 250

Issuance of restricted stock 280 3 -- -- -- 23 -- 26

Net loss for the year ended
June 30, 1999 -- -- -- -- -- -- (8,482) (8,482)
------ ----- -------- -------- -------- ------- -------- --------
Balance, June 30, 1999 17,580 176 26,074 261 -- 186,217 (125,731) 60,923
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-6
<PAGE> 57

TATHAM OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION:

Tatham Offshore, Inc. ("Tatham Offshore"), a Delaware corporation, is a
diversified energy company currently pursuing, through its operating
subsidiaries, energy related opportunities in Atlantic Canada, including
offshore contract drilling services, substantial natural gas gathering and
transmission facilities and related energy infrastructure. Historically, Tatham
Offshore was engaged in the development, exploration and production of oil and
gas reserves located primarily offshore the United States in the Gulf of Mexico
(the "Gulf"). As of June 30, 1998, Tatham Offshore was an approximately
94%-owned subsidiary of DeepTech International Inc. ("DeepTech"), a diversified
energy company. In connection with the merger of DeepTech with a subsidiary of
El Paso Energy Corporation ("El Paso Energy") and related transactions completed
on or before August 14, 1998, (i) Tatham Offshore transferred its ownership of
Tatham Offshore Development, Inc. ("Tatham Development"), a Delaware corporation
and former wholly-owned subsidiary of Tatham Offshore which held interests in
Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday Silence prospect, to
DeepTech, (ii) Tatham Offshore conveyed its remaining oil and gas properties to
Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), (iii) DeepTech contributed
all of the outstanding shares of capital stock of DeepFlex Production Services,
Inc. ("DeepFlex") to Tatham Offshore and (iv) DeepTech divested itself of its
equity ownership interest in Tatham Offshore. DeepFlex, a Delaware corporation
and wholly-owned subsidiary of Tatham Offshore, was formed in January 1995 and,
through its subsidiaries, focuses on the acquisition and deployment of
semisubmersible drilling rigs for contract drilling. RIGCO North America, L.L.C.
("RIGCO") and FPS VI, L.L.C. ("FPS VI"), wholly-owned subsidiaries of DeepFlex,
own interests in the FPS Laffit Pincay (the "Laffit Pincay") and the FPS Bill
Shoemaker (the "Bill Shoemaker" and, together with the Laffit Pincay, the
"Rigs"), both second generation semisubmersible drilling rigs.

Tatham Offshore Canada Limited, a wholly-owned subsidiary of Tatham Offshore,
pursues certain opportunities offshore eastern Canada and is the Canadian
representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic
Pipeline Partners"). North Atlantic Pipeline Partners is the sponsor of a
proposal to construct a natural gas pipeline and related infrastructure in the
Grand Banks area offshore Newfoundland and Nova Scotia to the eastern seaboard
of the United States. Through June 30, 1999, Tatham Offshore Canada Limited has
incurred $12,565,000 in costs associated with the North Atlantic project and
related infrastructure projects. Such costs include engineering, survey, legal,
regulatory and other costs associated with the project.

As described in Note 11, on August 9, 1999, RIGCO, FPS VI, FPS III, Inc. and FPS
V, Inc., wholly-owned subsidiaries of DeepFlex, filed voluntary petitions under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Filing").

NOTE 2 - DEEPTECH MERGER AND RELATED TRANSACTIONS:

On August 14, 1998, DeepTech merged with a subsidiary of El Paso (the "Merger").
As a result of the Merger and related transactions, some of the assets of Tatham
Offshore and DeepTech were restructured so that DeepFlex became a wholly-owned
subsidiary of Tatham Offshore and Tatham Offshore transferred its interest in
the Sunday Silence prospect to DeepTech. In addition, Tatham Offshore agreed to
transfer all of its remaining assets located in

F-7
<PAGE> 58

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

the Gulf to Leviathan, a former affiliate. As such, all of the Company's oil and
gas operations in the Gulf are reflected as discontinued operations in the
financial statements. Further, DeepTech divested itself of its equity ownership
interest in Tatham Offshore by offering all of the shares of Tatham Offshore
common stock and Series A Preferred Stock held by DeepTech to the stockholders
of DeepTech in a Rights Offering (discussed below).

On July 16, 1998, the Securities and Exchange Commission declared effective
Tatham Offshore's Registration Statement on Form S-1 relating to the offering of
rights to the DeepTech stockholders to purchase DeepTech's 28,073,450 shares of
Tatham Offshore common stock and 4,670,957 shares of Tatham Offshore's Series A
Preferred Stock (the "Rights Offering"). As a result of the Rights Offering,
unaffiliated parties purchased 3,378,693 shares of common stock and 562,148
shares of Series A Preferred Stock. Tatham Brothers Securities, LLC ("TB
Securities"), an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and
Chief Executive Officer of Tatham Offshore and DeepFlex, purchased 20,768,011
shares of common stock and 3,455,444 shares of Series A Preferred Stock which
resulted in DeepTech receiving net proceeds from the Rights Offering of $75.0
million. In exchange for committing to purchase a specified portion of the stock
underlying any unexercised rights, TB Securities received a fee of $6.9 million.
In connection with the Rights Offering, Tatham Offshore purchased and cancelled
all of the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of rights or TB Securities in the Rights Offering,
3,926,746 shares of Common Stock and 653,365 shares of Series A Preferred Stock,
respectively, and the proceeds from such purchase by Tatham Offshore were
contributed by DeepTech to Tatham Offshore. DeepTech no longer owns any of
Tatham Offshore's capital stock as a result of the Rights Offering.

Following the asset restructuring, Tatham Offshore's marine services business
includes the operation of two semisubmersible drilling rigs, the Bill Shoemaker
and the Laffit Pincay, currently owned by wholly-owned subsidiaries of DeepFlex.
In addition, Tatham Offshore will continue to pursue energy related
opportunities in Atlantic Canada, including the North Atlantic pipeline project,
related gas processing facilities, a facility for the generation of electricity
and other related investments.

Release of Tax Letter of Credit

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Tatham Offshore and those 50% or more owned subsidiaries controlled by Tatham
Offshore (collectively referred to as the "Company"). All of Tatham Offshore's
subsidiaries are currently 100% owned. All significant intercompany balances and
transactions have been eliminated in consolidation. All number of shares of
Tatham Offshore common stock and per share disclosures have been restated to
reflect a one-for-ten common share reverse stock split approved by the Board of
Directors of Tatham Offshore on November 13, 1997 for the shareholders of record
as of the close of business on November 24, 1997.

Cash and Cash Equivalents

All highly liquid investments with an original maturity of three months or less
are considered to be cash equivalents. The Company's restricted cash is cash
held in deposit to collateralize a letter of credit issued to the
Canada-Newfoundland Offshore Petroleum Board for an exploration license
commitment, offshore Newfoundland.

F-8
<PAGE> 59

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Semisubmersible Drilling Rigs

The cost of the semisubmersible drilling rigs is capitalized and depreciated
using the straight-line method over the drilling rigs' estimated useful lives of
25 years. Repair and maintenance costs are charged to expense as incurred;
additions, improvements and replacements are capitalized.

Effective July 1, 1996, the Company adopted Statement of Financial Account
Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
to Be Disposed Of". SFAS No. 121 required recognition of impairment losses on
long-lived assets (including semisubmersible drilling rigs) if the carrying
amount of such assets, grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows from
other assets, exceeds the estimated undiscounted future cash flows of such
assets. Measurement of any impairment loss is based on the fair value of the
assets. Implementation of SFAS No. 121 did not have a material adverse effect on
the Company's financial condition or results of operations.

Capitalization of Interest

Interest and other financing costs are capitalized in connection with
construction projects as part of the cost of the asset and amortized over the
related asset's estimated useful life.

Debt Issue Costs

Debt issue costs are capitalized and amortized over the life of the related
indebtedness. Any unamortized debt issue costs are expensed at the time the
related indebtedness is repaid or otherwise terminated.

Deferred Costs

Deferred costs primarily consist of costs related to advisory, legal and other
direct project costs of pending transactions. At June 30, 1999 and 1998, the
Company had capitalized $12,565,000 and $11,529,000, respectively, of
development costs related to its sponsorship of North Atlantic Pipeline
Partners' proposal to construct a pipeline offshore eastern Canada as discussed
in Note 1.

Revenue Recognition

Revenue from oil and gas sales was recognized upon delivery in the period of
production. Revenue from drilling services is recognized in the period rendered.
The Company's drilling services revenues are generated from contract drilling
services related to its two semisubmersible drilling rigs.

Income Taxes

The Company utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities.

Discontinued Operations

Discontinued operations represent Tatham Offshore's oil and gas exploration and
development business transferred to DeepTech and Leviathan as discussed in Note
2. These operations were accounted for using the successful efforts method of
accounting. Net sales from discontinued oil and gas operations were $0.9
million, $10.9 million and $20.7 million for fiscal years 1999, 1998 and 1997,
respectively. General and administrative expenses were allocated to discontinued
operations based on the percentage of employees' time related to the
discontinued operations and were $0.3 million, $4.9 million and $4.1 million for
fiscal years 1999, 1998 and 1997, respectively. Interest expense for years 1998
and 1997 was allocated 100% to discontinued operations.

F-9
<PAGE> 60

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Earnings per Share

During 1997, Tatham Offshore adopted SFAS No. 128, "Earnings per Share". SFAS
No. 128 establishes new guidelines for computing earnings per share ("EPS") and
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. Basic EPS excludes dilution and is computed by dividing net
income (loss) available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted EPS reflects potential
dilution and is computed by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding during
the period increased by the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued. All
prior period EPS data has been restated to conform with the provisions of SFAS
No. 128.

Tatham Offshore excluded from its computation of diluted EPS the effect of
antidilutive securities related to its outstanding convertible exchangeable
preferred stocks discussed in Note 2 and its convertible production payment
related to 25% of the net operating cash flow from Viosca Knoll Block 817.

Basic net loss per share equals diluted net loss per share for the years ended
June 30, 1999, 1998 and 1997.

Concentration of Credit Risk

The primary market for the Company's services is the offshore oil and gas
industry, and the Company's customers consist primarily of major oil companies
and independent oil and gas producers. The Company performs ongoing credit
evaluations of its customers and generally does not require material collateral.
The Company maintains reserves for potential credit losses when necessary.

Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions, including those related to oil and gas reserves and potential
environmental liabilities, that affect the reported amounts of certain assets
and liabilities, the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the related reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates. Management believes that its estimates are reasonable.

Other

The fair values of the financial instruments included in the Company's assets
and liabilities approximate their carrying values.

Tatham Offshore adopted SFAS No. 123, "Accounting for Stock Based Compensation",
effective July 1, 1996. While SFAS No. 123 encourages entities to adopt the fair
value method of accounting for their stock-based compensation plans, the Company
has elected to continue to utilize the intrinsic value method under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". The
adoption of SFAS No. 123 did not have a material adverse effect on the Company's
financial position or results of operations at adoption or during the years
ended June 30, 1999, 1998 and 1997.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon
adoption, all derivative instruments (including certain derivative instruments
embedded in other contracts) be recognized in the balance sheet at fair value,
and that changes in such fair values be recognized in earnings unless specific
hedging criteria are met. Changes in the values of derivatives that meet these
hedging criteria will ultimately offset related earnings effects of the hedged
items; effects of certain changes in fair value are recorded in Other
Comprehensive Income pending recognition in earnings. SFAS 133, as amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of SFAS No. 133", is effective for fiscal years
beginning after June 15, 2000. The Company believes adoption will not have a
material effect on its results of operations, cash flows or financial position.

F-10
<PAGE> 61

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Certain amounts in prior years have been reclassified to conform to the current
year's presentation.

The Company utilized an off-balance sheet financial instrument to manage the
interest rate associated with its borrowings. An interest rate cap was used to
lock in a maximum rate, but enabled the Company to otherwise pay lower market
rates. The cost of the interest rate cap was amortized to interest expense over
the life of the cap, and the unamortized cost was included in other assets. The
interest rate cap expired on September 30, 1998.

NOTE 4 - PROPERTY AND EQUIPMENT:

SEMISUBMERSIBLE DRILLING RIGS

At June 30, 1999, capitalized costs and related accumulated depreciation of
semisubmersible drilling rigs totaled $146,487,000 and $12,204,000. At June 30,
1998, capitalized costs and related accumulated depreciation of semisubmersible
drilling rigs totaled $135,754,000 and $6,493,000. The Company owns 100% of the
FPS Laffit Pincay and the FPS Bill Shoemaker through its wholly owned
subsidiaries.

The FPS Bill Shoemaker is currently operated under management and charter
agreements with Sedco Forex. Sedco Forex is responsible for all aspects of
operating and marketing of the drilling rigs, subject to agreed budgets and
certain authorizations for new contracts. The agreements with Sedco Forex
provide them with a management fee and the recoupment of their actual operating
costs.

OIL AND GAS PROPERTIES - DISCONTINUED OPERATIONS

All of the Company's oil and gas properties were transferred as of August 14,
1998 (as discussed in Note 2) and are reflected as discontinued operations in
the statement of operations. The following reflects historical information.

Capitalized Costs

<TABLE>
<CAPTION>
June 30,
---------
1998
(In thousands)

<S> <C>
Proved properties $ 4,099
Unproved properties --
Wells, equipment and related facilities 22,663
-----------
Total capitalized costs 26,762
Accumulated depreciation, depletion
amortization and impairment (21,038)
-----------
Net capitalized costs $ 5,724
===========
</TABLE>

Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Activities

<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1998 1997
(In thousands)

<S> <C> <C>
Acquisition of proved properties $ -- $ --
Exploration 149 542
Development 353 2,923
----------- -----------
Total costs incurred $ 502 $ 3,465
=========== ===========

</TABLE>

F-11
<PAGE> 62

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Results of Operations for Oil and Gas Producing Activities

Year ended June 30,
----------------------------
1998 1997
(In thousands)
<S> <C> <C>
Oil and gas sales $ 10,868 $ 20,723
Production and operating expenses (5,238) (8,465)
Exploration expenses (149) (542)
Depreciation, depletion and amortization (4,099) (5,364)
Impairment, abandonment and other -- (41,674)
----------- -----------
Results of operations from oil and gas producing
activities (excluding corporate overhead,
interest costs and income tax benefits) $ 1,382 $ (35,322)
=========== ===========
</TABLE>

Sale of Properties to Leviathan

On June 30, 1995, Leviathan entered into a purchase and sale agreement (the
"Purchase and Sale Agreement") with Tatham Offshore. Pursuant to the Purchase
and Sale Agreement, Leviathan acquired, subject to certain reversionary
interests, a 75% working interest in Viosca Knoll Block 817, a 50% working
interest in Garden Banks Block 72 and a 50% working interest in Garden Banks
Block 117 (the "Assigned Properties") from Tatham Offshore for $30,000,000.
Tatham Offshore received $15,000,000 at closing and an additional $15,000,000 on
August 15, 1995. Leviathan was entitled to retain all of the revenue
attributable to the Assigned Properties until it received net revenue equal to
the Payout Amount (as defined below), whereupon Tatham Offshore was entitled to
receive a reassignment of the Assigned Properties, subject to reduction and
conditions as discussed below. Prior to December 10, 1996, "Payout Amount" was
defined as an amount equal to all costs incurred by Leviathan with respect to
the Assigned Properties (including the $30,000,000 acquisition cost paid to
Tatham Offshore) plus interest thereon at a rate of 15% per annum. Effective
February 1, 1996, Leviathan entered into an agreement with Tatham Offshore
regarding the restructuring of certain transportation agreements that increased
the amount recoverable from the Payout Amount by $7,500,000 plus interest (see
"Impairment, Abandonment and Other" discussion below).

Effective December 10, 1996, Leviathan exercised its option to permanently
retain 50% of the acquired working interest in the Assigned Properties in
exchange for forgiving 50% of the then-existing Payout Amount exclusive of the
$7,500,000 plus interest added to the Payout Amount in connection with the
restructuring of certain transportation agreements discussed above. Leviathan
remained obligated to fund any further development costs attributable to Tatham
Offshore's portion of the working interests, with such costs to be added to the
Payout Amount. Leviathan's election to retain 50% of the acquired working
interest in the Assigned Properties reduced the Payout Amount from $94,020,000
to $50,760,000. Subsequent to December 10, 1996, only 50% of the development and
operating costs attributable to the Assigned Properties were added to the Payout
Amount and 50% of the net revenue from the Assigned Properties reduce the Payout
Amount. See "Impairment, Abandonment and Other" discussion below and Note 2. As
a result of the Merger and related transactions, the reversionary interests were
cancelled.

Viosca Knoll Block 817

In September 1995, Tatham Offshore reacquired an aggregate 25% working interest
in Viosca Knoll Block 817 and an approximate 12.5% working interest in the
remainder of Viosca Knoll Blocks 772/773, 774, 818 and 861 (collectively, the
"Viosca Knoll Properties") from two industry partners for a total of $16,000,000
in convertible production payments payable from 25% of the net cash flow from
the Viosca Knoll Properties so acquired. The estimated net present value of the
convertible production payments payable of $2,000,000 was recorded as oil and
gas properties on the date of acquisition. The unpaid portion of the production
payments was convertible into Tatham Offshore common stock at any time during
the first five years at $8.00 per share. At June 30, 1998, the unpaid portion of
the production payment obligation totaled $11,299,000. For the years ended June
30, 1998 and 1997, production and operating expenses include $1,236,000 and
$1,465,000, respectively, of production payments

F-12
<PAGE> 63

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

made during the year. As part of the Redemption Agreement, this property was
transferred to Leviathan effective August 14, 1998.

Transportation and Processing Agreements

General. In December 1993, Tatham Offshore entered into a master gas dedication
arrangement with Leviathan (the "Master Dedication Agreement"). Under the Master
Dedication Agreement, Tatham Offshore dedicated all production from its Garden
Banks, Viosca Knoll, Ewing Bank and Ship Shoal leases as well as certain
adjoining areas of mutual interest to Leviathan for transportation. In exchange,
Leviathan agreed to install the pipeline facilities necessary to transport
production from the areas and certain related facilities and to provide
transportation services with respect to such production. Tatham Offshore agreed
to pay certain fees for transportation services and facilities access provided
under the Master Dedication Agreement. Pursuant to the terms of the Purchase and
Sale Agreement, Leviathan assumed all of Tatham Offshore's obligations under the
Master Dedication Agreement and certain ancillary agreements with respect to the
Assigned Properties.

Ewing Bank Gathering System. Pursuant to a gathering agreement (the "Ewing Bank
Agreement") among Tatham Offshore, DeepTech, and a subsidiary of Leviathan,
Tatham Offshore dedicated all natural gas and crude oil produced from eight of
its Ewing Bank leases for gathering and redelivery by Leviathan and was
obligated to pay a demand rate as well as a commodity charge equal to 4% of the
market price of production actually transported. Tatham Offshore's Ewing Bank
914 #2 well commenced production in August 1993. Production and operating
expenses on the accompanying consolidated statement of operations included
commodity fees of $1,493,000 for the year ended June 30, 1997, related to the
Ewing Bank Agreement. In March 1996, Leviathan settled all remaining unpaid
demand charge obligations under this agreement in exchange for certain
consideration as discussed below.

Ship Shoal. Tatham Offshore and Leviathan also entered into a gathering and
processing agreement (the "Ship Shoal Agreement") pursuant to which Leviathan
constructed a gathering line from Tatham Offshore's Ship Shoal Block 331 lease
to interconnect with a third-party pipeline at Leviathan's processing facilities
located on its Ship Shoal Block 332 platform. Pursuant to the terms of the Ship
Shoal Agreement, and in consideration for constructing the interconnect,
refurbishing the platform and providing access to the processing facilities,
Tatham Offshore was required to pay Leviathan demand charges and to dedicate all
production from its Ship Shoal 331 lease and eight additional surrounding leases
for gathering and processing by Leviathan for additional commodity fees.
Production and operating expenses on the accompanying consolidated statement of
operations included commodity fees of $638,000 for the year ended June 30, 1997,
related to the Ship Shoal Agreement. In March 1996, Leviathan settled all
remaining unpaid demand charge obligations under this agreement in exchange for
certain consideration as discussed below.

Transportation Agreements Settled. Effective February 1, 1996, Tatham Offshore
entered into an agreement with Leviathan to prepay its remaining demand charge
obligations under the Ewing Bank and Ship Shoal Agreements. Under the agreement,
Tatham Offshore's demand charge obligations relative to the Ewing Bank Gathering
System and the pipeline facilities constructed by Leviathan for its Ship Shoal
property were prepaid in full. In exchange, Tatham Offshore (i) issued to
Leviathan 7,500 shares of Senior Preferred Stock (as defined in Note 6) with a
liquidation preference of $1,000 per share, (ii) added the sum of $7,500,000 to
the Payout Amount under the Purchase and Sale Agreement and (iii) granted to
Leviathan certain rights to use and acquire the Ship Shoal Block 331 platform.
Leviathan had the right to utilize the Ship Shoal Block 331 platform and related
facilities at a rental rate of $1.00 per annum for such period as the platform
is owned by Tatham Offshore and located on the Ship Shoal Block 331, provided
such use did not interfere with lease operations or other activities of Tatham
Offshore. In addition, Leviathan had a right of first refusal relative to a sale
of the platform. The agreement with Leviathan resulted in a reduction in demand
charge payments of $7,800,000 for the year ended June 30, 1997. See "Impairment,
Abandonment and Other" discussion below. This agreement was transferred to
Leviathan on August 14, 1998 as part of the Redemption Agreement.

F-13
<PAGE> 64

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Impairment, Abandonment and Other

In May 1997, Tatham Offshore shut-in the Ewing Bank 914 #2 well as a result of a
downhole mechanical problem. Although Tatham Offshore was evaluating potential
workover and recompletion alternatives for this well, the Company, at June 30,
1997, reserved its remaining investment in the Ewing Bank 914 #2 well and
certain adjacent leases and accrued additional costs associated with the
abandonment of this well and the Ewing Bank 915 #4 well. In May 1998, Tatham
Offshore completed abandonment procedures on these wells.

Problems resulting from the completion of three wellbores at Ship Shoal Block
331 resulted in only a minimal amount of production from the property and Tatham
Offshore decided not to pursue further recompletion operations. As a result of
this decision, at June 30, 1997, Tatham Offshore reserved its remaining
investment in its Ship Shoal Block 331 and accrued costs associated with the
abandonment of the platform and wells. In December 1997, Tatham Offshore
assigned its Ship Shoal Block 331 lease and related abandonment obligations to a
third party.

In summary, impairment, abandonment and other on the accompanying consolidated
statement of operations includes the following items related to the Ewing Bank
and Ship Shoal properties discussed above.

<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1998 1997
(In thousands)

<S> <C> <C>
Reserve investments in oil and gas properties $ -- $ 32,389
Accrue abandonment costs -- 6,622
Expense prepaid demand charges, net -- 2,663
----------- -----------
$ -- $ 41,674
=========== ===========
</TABLE>

NOTE 5 - INDEBTEDNESS:

RIGCO Credit Facility

On September 30, 1996, RIGCO, a subsidiary of DeepFlex, entered into a $65
million senior secured credit facility with a syndicate of lenders (as amended,
the "Credit Facility"). Proceeds from the Credit Facility were used to acquire
the Bill Shoemaker, to fund significant upgrades to the Bill Shoemaker, and to
retire $30.3 million of other rig related indebtedness. In April 1997, the
Credit Facility was amended to provide for an additional $12 million to fund the
remaining refurbishments and upgrades to the Bill Shoemaker. The Credit Facility
(i) matured on April 30, 1999, (ii) provides for interest at the prime rate plus
3% per annum (10 3/4% at June 30, 1999), payable quarterly, (iii) is secured by
the two semisubmersible drilling rigs and all of the related assets, (iv)
required a quarterly principal payment of excess cash flow as defined in the
credit agreement with a minimum principal amortization of $250,000 per quarter
beginning on December 31, 1996 and ending on September 30, 1998, (v) provided
the lenders warrants to acquire a 5% minority equity interest in the
subsidiaries which own the Rigs, and (vi) is subject to customary conditions and
covenants, including the maintenance of a minimum level of working capital. As
of June 30, 1999, amounts outstanding under the Credit Facility totaled $58.1
million in principal and $3.4 million in accrued interest. The $3.4 million of
accrued interest is included in accounts payable and accrued liabilities on the
consolidated balance sheet. On September 25, 1998, the parties to the Credit
Facility amended the agreement to (i) extend the maturity date from September
30, 1998 to March 31, 1999, (ii) waive all principal payments until the maturity
date, and (iii) extend the expiration date on the warrants issued to the lenders
under the original Credit Facility to March 31, 1999. RIGCO paid a total of 0.5%
of the outstanding principal balance to the lenders in connection with the
amendment.

F-14
<PAGE> 65

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

RIGCO did not make the principal payment or interest payment due on April 30,
1999 and is presently in default under the terms of the Credit Facility. By
letter dated May 3, 1999, the administrative agent for the lenders advised RIGCO
that the loan was in default and that the Lenders would not exercise their
rights, remedies, powers and privileges under the Credit Facility and other
related loan documents at that time, but that they reserve the right to do so at
any time they deem appropriate. See Note 11 - Subsequent Events.

As required by the RIGCO Credit Facility, RIGCO purchased an interest rate cap
from a financial institution which established a maximum rate of 11.74% per
annum on $36.5 million of outstanding principal for the remaining term of the
credit facility. The interest rate cap expired on September 30, 1998.

Long-Term Debt - Affiliates

In connection with the Merger, the Company entered into a $22.9 million
short-term financing arrangement with Tatham Brothers (as amended, the
"Short-Term Facility") to provide for funds to (i) satisfy approximately $1.6
million of cash requirements with respect to the Redemption Agreement with
Leviathan, (ii) pay $1.4 million to DeepTech in connection with the Management
Agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9
million to TB Securities with respect to obligations under the Rights Offering,
(iv) fund a $7.5 million letter of credit for potential tax liabilities, (v)
refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and
expenses associated with the Short-Term Facility. Tatham Brothers is an
affiliate of Thomas P. Tatham and the parent company of TB Securities. The
Short-Term Facility accrued interest at the rate of 12% per annum and was due on
January 15, 1999. On January 15, 1999, the Company and Tatham Brothers agreed to
refinance the original $22.9 million principal plus $1.1 million of accrued
interest into a new short-term loan which bears interest at the rate of 15% per
annum and was due March 31, 1999. In connection with the refinancing, the
Company paid Tatham Brothers a fee of $1.0 million in the form of a 15%
subordinated convertible note (the "Subordinated Convertible Note"). The
Subordinated Convertible Note bears interest at the rate of 15% per annum and is
due on August 15, 2001. Tatham Brothers may convert the principal amount of the
Subordinated Convertible Note and accrued unpaid interest into shares of Common
Stock of the Company based on the average market price for the five trading days
prior to the end of the previous calendar quarter. The Short-Term Facility is
secured by a pledge of DeepFlex of its interest in certain payment-in-kind
Subordinated Promissory Notes issued by RIGCO North America, L.L.C. and FPS V,
Inc., both subsidiaries of the Company, which had an outstanding balance of
approximately $78.9 million at June 30, 1999. On March 31, 1999, the Company and
Tatham Brothers extended the Short-Term Facility until April 30, 1999. Pursuant
to the terms of the Short-Term Facility, Tatham Offshore was required to pay
$24.1 million in principal and $0.3 million in interest on April 30, 1999.
Tatham Offshore did not make payment of such amount; as a result, an Event of
Default has occurred and is continuing under the Short-Term Facility. As of June
30, 1999, the principal balance and accrued interest under the Short-Term
Facility and Subordinated Convertible Note totaled $26.1 million and are
included in long-term debt to affiliates currently payable on the consolidated
balance sheet.

As of June 30, 1997, Tatham Offshore had $60,000,000 aggregate principal amount
of Subordinated Convertible Promissory Notes (the "Subordinated Notes")
outstanding, all of which were held by DeepTech. Interest expense related to the
Subordinated Notes totaled $1,709,000 from July 1, 1997 through September 18,
1997, the date on which the DeepTech Board of Directors approved entering into
an option agreement to restructure the Subordinated Notes (the "Restructuring
Agreement"). Pursuant to the Restructuring Agreement, DeepTech forgave the
scheduled interest payments due in September and December 1997 under the
Subordinated Notes and on December 17, 1997, converted the Subordinated Notes
into 26,666,667 shares of Tatham Offshore common stock at a conversion rate of
$2.25 per share, the average closing price of Tatham Offshore common stock for
the ten trading days immediately preceding the exercise of the option. As a
result of the conversion of the Subordinated Notes, Tatham Offshore eliminated
all of its then existing outstanding debt.

The Subordinated Notes bore interest at a rate of 11 3/4% per annum, payable
quarterly. Effective July 1, 1997, the interest rate increased to 13% per annum.
Interest expense related to this borrowing totaled $1,709,000 and $7,040,000 for
the years ended June 30, 1998 and 1997, respectively.

F-15
<PAGE> 66

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Other - Affiliates

On June 30, 1999, RIGCO borrowed $439,062 from Tatham Investment Corporation, an
affiliate of Mr. Tatham. Proceeds were used for working capital requirements.
This borrowing matures on September 30, 1999, and bears interest at the prime
rate plus 3% per annum. This borrowing is included in long-term debt to
affiliates currently payable on the consolidated balance sheet.

Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from Bank
of America, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex to
fund certain improvements to the Rigs. The loan bears interest at LIBOR plus 2%
and is due on September 30, 1999 or upon demand. The loan from Tatham Brothers
to DeepFlex, plus accrued interest, is included in the amount payable under
"--Long-Term Debt-Affiliates" as discussed above.

NOTE 6 - STOCKHOLDERS' EQUITY:

The following table summarizes Tatham Offshore's outstanding equity:

<TABLE>
<CAPTION>
Dividends In Arrears
Shares Outstanding at June 30, June 30, Conversion/
------------------------------ Liquidation Dividend ---------------------- Exchange
Equity 1999 1998 Preference Rate 1999 1998 Features

<S> <C> <C> <C> <C> <C> <C> <C>
Senior Preferred Stock (a) -- 7,500 $1,000 per share 9% $ -- 1,631,000 (a) (d)

Series A Preferred Stock (b) 17,184,133(h) 17,557,648(h) $ 1.50 per share 12% 9,363,000 6,321,000 (e)(f)

Series B Preferred Stock 74,379 74,379 $ 1.00 per share 8% 16,000 10,000 (e)(f)

Series C Preferred Stock 321,205 321,205 (c) $ 0.50 per share 4% 16,000 10,000 (e)(f)

Mandatory Redeemable
Preferred Stock -- -- $ 0.50 per share -- -- -- (g)

Common Stock 26,074,321(h) 30,001,026(h) N/A -- -- -- --
</TABLE>

- -------------------------------

(a) In March 1998, Tatham Offshore eliminated its 9% Senior Convertible
Preferred Stock and replaced this stock with Series B 9% Senior
Convertible Preferred Stock ("Senior Preferred Stock"). Each share of the
Senior Preferred Stock was senior to all other classes of Tatham Offshore
preferred and common stock in the case of liquidation, dissolution or
winding up of Tatham Offshore. Leviathan held all outstanding shares. In
connection with the Redemption Agreement, the Senior Preferred Stock and
all related unpaid dividends were redeemed in full. See Note 2.
(b) DeepFlex held 4,670,957 shares of the outstanding Series A Preferred Stock
at June 30, 1997. In March 1998, DeepFlex conveyed its 4,670,957 shares of
Series A Preferred Stock to DeepTech. See Note 2.
(c) DeepFlex held 1,016,957 and 4,312,086 shares of the outstanding
Series C Preferred Stock and Mandatory Redeemable Preferred Stock,
respectively, at June 30, 1997. In February 1998, DeepFlex exchanged its
1,016,957 shares of Tatham Offshore Series C Preferred Stock for 406,783
Exchange Warrants and immediately converted the Exchange Warrants into
406,783 shares of common stock at $6.53 per share for a total of
$2,656,000 in proceeds to Tatham Offshore. Tatham Offshore used $2,496,000
of proceeds to redeem all of its 4,991,377 shares of Mandatory Redeemable
Preferred Stock outstanding at $0.50 per share as required under the
terms of the Mandatory Redeemable Preferred Stock issue. DeepFlex
conveyed the 406,783 shares of common stock to DeepTech in March 1998.
See Note 2.
(d) The Senior Preferred Stock was convertible into Series A Preferred Stock
using a conversion ratio equal to (i) the liquidation preference amount
plus accumulated unpaid dividends divided by (ii) $0.9375, the closing
price of the Series A Preferred Stock on February 27, 1998.
(e) At any time until December 31, 1998, each share could have been exchanged
for 0.4 Exchange Warrants. Each full Exchange Warrant entitled the holder
thereof to purchase one share of Tatham Offshore common stock at $6.53 per
share. The Exchange Warrants expired on July 1, 1999. Alternatively, at
any time, the holder of any shares may convert the liquidation value and
unpaid dividends into shares of Tatham Offshore common stock at $6.53 per
share.
(f) Redeemable at the option of Tatham Offshore on or after July 1, 1997.
(g) Tatham Offshore was required to redeem at a redemption price of $0.50 per
share if Tatham Offshore redeems any shares of Series A, B or C Preferred
Stock. Tatham Offshore was also required to redeem at a redemption price
of $0.50 per share from net proceeds from the sale of common stock
pursuant to the exercise of Exchange Warrants, subject to certain
conditions. See (c) above.
(h) In connection with the Rights Offering, Tatham Offshore purchased all of
the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of Rights or TB Securities in the Rights Offering,
3,926,746 and 653,365, respectively, and the proceeds from such purchase
by Tatham Offshore were contributed by DeepTech to Tatham Offshore.

F-16
<PAGE> 67

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Common Stock

Effective February 1996, an amendment to Tatham Offshore's Restated Certificate
of Incorporation increased the number of authorized shares of Tatham Offshore's
common stock, $0.01 par value per share, from 100,000,000 shares to 250,000,000
shares and the number of shares of preferred stock, $0.01 par value per share,
from 10,000,000 shares to 110,000,000 shares. This increase in authorized
capital was necessary in order for Tatham Offshore to effect the Rights
Offering, as discussed below.

During the year ended June 30, 1998, Tatham Offshore issued 90,000 shares of
common stock to a consultant for services rendered in connection with the
Company's activities in Atlantic Canada.

Preferred Stock

Tatham Offshore filed a registration statement (the "Offering") with the
Securities and Exchange Commission (the "Commission") which was declared
effective on December 26, 1995, relating to the granting to all holders of
Tatham Offshore's common stock, on the record date, December 26, 1995, rights
(the "Rights") to purchase up to 25,120,948 warrants (the "Warrants"). Each
Right entitled the holder to subscribe to purchase one Warrant at the purchase
price of $.50 per Warrant. In February 1996, Tatham Offshore issued 25,120,948
Warrants and received $12,560,000 in gross proceeds ($11,291,000 in net
proceeds) pursuant to the exercise of Rights. A total of 20,129,571 Warrants
were exercised to purchase 18,717,030 shares, 74,379 shares and 1,338,162 shares
of Series A, B and C Preferred Stock, respectively, at $1.00 per share which
generated an additional $15,459,000 in proceeds to Tatham Offshore. The
remaining 4,991,377 Warrants outstanding on January 1, 1997 were automatically
converted into an equal number of shares of Mandatory Redeemable Preferred
Stock.

In February 1998, DeepFlex exchanged its 1,016,957 shares of Tatham Offshore
Series C Preferred Stock for 406,783 Exchange Warrants and immediately converted
the Exchange Warrants into 406,783 shares of common stock at $6.53 per share for
a total of $2,656,000 in proceeds to Tatham Offshore. Tatham Offshore used
$2,496,000 of proceeds to redeem all of its 4,991,377 shares of Mandatory
Redeemable Preferred Stock outstanding at $0.50 per share as required under the
terms of the Mandatory Redeemable Preferred Stock issue. DeepFlex conveyed the
406,783 shares of common stock to DeepTech in March 1998.

Warrants to Acquire Subsidiary Stock

In connection with the Credit Facility, the lenders were granted warrants to
acquire a 5% minority equity interest in the subsidiaries which own the Rigs. On
April 30, 1999, the warrants expired unexercised.

Stock Compensation Plans

On August 28, 1995, Tatham Offshore filed a registration statement on Form S-8
with the Commission for the registration of 4,000,000 shares of common stock
authorized for issuance upon exercise of options under Tatham Offshore's Equity
Incentive Plan (the "Incentive Plan") and 1,000,000 shares of common stock
authorized for issuance upon exercise of options under Tatham Offshore's
Non-Employee Director Stock Option Plan (the "Director Option Plan" and
collectively with the Incentive Plan, the "Option Plans"). The Incentive Plan,
as amended, provides Tatham Offshore the ability to issue a variety of awards
pursuant to the plan including stock options, restricted stock, stock
appreciation rights and stock value equivalent awards. Options granted pursuant
to the Director Option Plan and the Incentive Plan vest 33 1/3% each year
beginning December 31, 1999 and December 31, 2001, respectively. Both plans
terminate December 31, 2005. In January 1998, Tatham Offshore issued 100,000
options under the Incentive Plan. During the year ended June 30, 1999, Tatham
Offshore issued 600,000 options and 280,000 shares of restricted Series A
Preferred Stock under the Incentive Plan. During the years ended June 30,
1999, 1998 and 1997, Tatham Offshore issued 400,000 options, 15,000 options
and 9,000 options, respectively, pursuant to the Director Option Plan. All
options issued under the Option Plans were issued at the current market
price of the underlying stock at the date of grant. Options outstanding under
the Option Plans at June 30, 1999 totaled 1,117,500 of which 40,500 options
were exercisable. In addition, Tatham Offshore issued 79,000 stock appreciation
rights pursuant to the Incentive Plan during the year ended June 30, 1997, all
of which have expired unexercised.

F-17
<PAGE> 68

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Tatham applies APB Opinion No. 25 and related interpretations in accounting for
its option plans, under which no compensation cost has been recognized. Had
compensation costs for the Option Plan been determined consistent with the
methodology prescribed under SFAS No. 123, the Company's net loss and loss per
share would have been adjusted to the pro forma amounts presented below:

Year ended June 30,
-----------------------------------------------
1999 1998 1997
(In thousands)

<S> <C> <C> <C> <C>
Net (loss) As presented $ (11,537) $ (8,581) $ (51,891)
Pro forma (11,747) (8,918) (51,891)

Loss per share As presented $ (0.43) $ (0.50) $ (19.47)
Pro forma (0.44) (0.52) (19.47)
</TABLE>

The following table summarizes the Option Plans:

<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 136,500 $ 4.72 24,500 $ 13.90 15,500 $ 17.30
Granted 1,000,000 .41 115,000 3.00 9,000 8.10
Exercised -- -- -- -- -- --
Canceled (19,000) 4.72 (3,000) 13.90 -- --
--------- --------- --------- --------- -------- --------
Outstanding at end of year 1,117,500 $ .89 136,500 4.72 24,500 13.90
========= ========= ========= ========= ======== ========

Options exercisable at June 30 40,500 $ 8.47 31,500 8.72 9,500 23.10
========= ========= ========= ========= ======== ========
Weighted average fair value of
options granted during the year $ .21 $ 2.93 $ 7.90
========= ========= ========

</TABLE>

The following table summarizes information about stock options outstanding at
June 30, 1999:

Options Outstanding
------------------------------------------------- Options Exercisable
Weighted Average ---------------------------------
Number Remaining Number
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
.41 1,000,000 4.8 .41 0 .41
3.00 100,000 3.5 3.00 25,000 3.00
8.12 15,000 .3 8.12 13,000 8.12
65.00 2,500 .3 65.00 2,500 65.00
--------- ---- ----- ------- -----
1,117,500 4.6 .89 40,500 8.47

</TABLE>

F-18
<PAGE> 69

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The fair value at each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:

Year ended June 30,
-----------------------------------------
1999 1998 1997

<S> <C> <C> <C>
Volatility 157% 132% 129%
Risk-free interest rate 5.9% 5.5% 6.5%
Dividend yield 0% 0% 0%
Expected life 10 years 10 years 10 years

</TABLE>

Tatham Offshore issued 79,000 stock appreciation rights pursuant to the
Incentive Plan during the year ended June 30, 1997.

NOTE 7 - RELATED PARTY TRANSACTIONS:

Management Agreement

The management agreement between Tatham Offshore and DeepTech provided for an
annual management fee which was intended to reimburse DeepTech for the estimated
costs of its operational, financial, accounting and administrative services
provided to the Company. Effective July 1, 1997, the management agreement was
amended to provide for an annual management fee of 26% of DeepTech's overhead
expenses. During the twelve months ended June 30, 1999, DeepTech charged Tatham
Offshore $310,000 under this agreement. The management agreement was terminated
August 14, 1998 and Tatham Offshore hired and employed its management and
support personnel directly.

Long-Term Debt to Affiliates

In connection with the Merger, the Company entered into the Short-Term Facility
to provide for funds to (i) satisfy approximately $1.6 million of cash
requirements with respect to the Redemption Agreement with Leviathan, (ii) pay
$1.4 million to DeepTech in connection with the Management Agreement between
Tatham Offshore and DeepTech, (iii) pay approximately $6.9 million to TB
Securities with respect to obligations under the Rights Offering, (iv) fund a
$7.5 million letter of credit for potential tax liabilities, (v) refinance $5.1
million in existing loans to DeepFlex and (vi) pay fees and expenses associated
with the Short-Term Facility. Tatham Brothers is an affiliate of Mr. Thomas P.
Tatham and the parent company of TB Securities. The original terms of the
Short-Term Facility provided for an interest rate of 12% per annum and was due
on January 15, 1999. On January 15, 1999, the Company and Tatham Brothers agreed
to refinance the original $22.9 million principal plus $1.1 million accrued
interest into a new short-term loan which bears interest at the rate of 15% per
annum and was due March 31, 1999. In connection with the refinancing, the
Company paid Tatham Brothers a fee of $1.0 million in the form of a 15%
subordinated convertible note (the "Subordinated Convertible Note"). The
Subordinated Convertible Note bears interest at the rate of 15% per annum and is
due on August 15, 2001. Tatham Brothers may convert the principal amount of the
Subordinated Convertible Note and accrued unpaid interest into shares of Common
Stock of the Company based on the average market price for the five trading days
prior to the end of the previous calendar quarter. The Short-Term Facility is
secured by a pledge of DeepFlex of its interest in certain payment-in-kind
Subordinated Promissory Notes issued by RIGCO North America, L.L.C. and FPS V,
Inc., both subsidiaries of the Company, which had an outstanding balance of
approximately $78.9 million at June 30, 1999. Pursuant to the terms of the
Short-Term Facility, Tatham Offshore was required to pay $24.1 million in
principal and $0.3 million in interest on April 30, 1999. Tatham Offshore did
not make payment of such amounts; as a result, an Event of Default has occurred
and is continuing under the Short-Term Facility.

The Standby Agreement (the "Standby Agreement"), dated as of February 27, 1998,
was executed in connection with the Merger and related transactions and is by
and among Tatham Offshore, DeepTech, Mr. Thomas P. Tatham and El Paso. Pursuant
to the Standby Agreement, to the extent that any of the Company's Common Stock
or Series A Preferred Stock was not subscribed for by holders of DeepTech common
stock in the Rights Offering, Tatham Brothers committed to purchase such number
of unsubscribed shares in order for DeepTech to receive net proceeds

F-19
<PAGE> 70

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

from the Rights Offering of not less than $75 million (the "Standby
Commitment"). In addition, Tatham Brothers had the right to purchase any shares
which DeepTech held after the Rights Offering and the satisfaction of the
Standby Commitment. Mr. Tatham unconditionally guaranteed Tatham Brothers'
performance of the Standby Commitment, which guarantee was backed by a letter of
credit from NationsBank, N.A. In consideration of Mr. Tatham's guarantee of the
Standby Commitment, under the terms of a Repayment Agreement between Mr. Tatham
and Tatham Brothers, dated February 27, 1998, (i) Tatham Brothers granted to Mr.
Tatham an option to purchase up to a one-third membership interest in Tatham
Brothers for $1,000 through the issuance of new membership units, and (ii) Mr.
Tatham had the right, but not the obligation, to lend to Tatham Brothers all
sums necessary for Tatham Brothers to fulfill its obligations under the Standby
Commitment. In exchange for certain consideration, Tatham Brothers assigned all
of its rights and interest under the Standby Agreement and the Standby
Commitment to TB Securities.

Pursuant to the Purchase Commitment Agreement, dated as of February 27, 1998 by
and between Tatham Brothers and Tatham Offshore, in consideration of the Standby
Commitment, the Company paid Tatham Brothers a fee of $6.9 million, which amount
was included in the amount payable under the Short-Term Facility.

Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from
NationsBank, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex to
fund certain improvements to the Rigs. The loan bears interest at LIBOR plus 2%
and is due on September 30, 1999 or upon demand. The loan from Tatham Brothers
to DeepFlex, plus accrued interest, was included in the amount payable under the
Short-Term Facility discussed above.

In connection with the Bill Shoemaker make-ready agreement with Sedco Forex,
RIGCO secured a $6.5 million letter of credit in January 1999 to secure payment
to Sedco Forex, and the funds used to secure such letter of credit were provided
by Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of
the Company. The $6.5 million in collateral funds plus accrued liquidated
damages totaling $1.3 million are included in accounts payable to affiliates on
the consolidated balance sheet. In exchange for providing the funds to secure
the letter of credit, the Company paid a fee of $500,000 to Mr. Tatham. The
Company has agreed to pay Mr. Tatham, as liquidated damages, $10,000 per day
from February 15, 1999 until such funds are returned. The liquidated damages
payment would be in the form of a promissory note bearing interest at the rate
of 18% per annum. On February 10, 1999, Tatham Offshore issued two promissory
notes, each in the original principal amount of $1.1 million, to Tatham Brothers
and a foundation associated with Mr. Thomas P. Tatham, respectively, to secure
funds to purchase new anchor chains in connection with the Bill Shoemaker
make-ready. Effective with the purchase of the anchor chains, RIGCO and Tatham
Offshore entered into an agreement whereby RIGCO has the option to either lease
or purchase the anchor chains from Tatham Offshore. In April 1999, Tatham
Offshore Canada Limited purchased the two promissory notes for their principal
amount plus accrued interest. See Notes 1 and 2 for additional related party
transactions completed in connection with the Merger.

Tatham Aviation, Inc. ("Tatham Aviation"), whose sole shareholder is Thomas P.
Tatham, has provided the Company use of a corporate aircraft. The agreement
between the Company and Tatham Aviation provides for the Company's reimbursement
of operating costs, insurance and carrying costs in exchange for the use of the
corporate aircraft. During the twelve months ended June 30, 1999, the Company
paid Tatham Aviation $2.4 million under this agreement.

Leviathan Gas Pipeline Partners, L.P.

Leviathan charged Tatham Offshore $197,500, $1,827,000 and $1,995,000 for the
years ended June 30, 1999, 1998, 1997, respectively, for commodity and platform
access fees associated with the Viosca Knoll 817 lease in accordance with
certain agreements between the parties. Commodity charges are based on the
volume of oil and gas transported or processed.

Other

During the years ended June 30, 1999, 1998, and 1997, Tatham Offshore sold 99%
of its production to Offshore Gas Marketing, Inc. ("Offshore Marketing"), an
80%-owned subsidiary of DeepTech. Through October 1995, the sales prices were
based upon contractually agreed-upon posted prices. In November 1995, Tatham
Offshore renegotiated its agreement with Offshore Marketing to provide Offshore
Marketing fees equal to 2% of the sales value of crude oil and condensate and
$0.015 per dekatherm of natural gas for selling the Company's production.

F-20
<PAGE> 71

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Dover Technology, Inc. ("Dover"), a 50%-owned subsidiary of DeepTech, charged
Tatham Offshore $160,000 for the year ended June 30, 1997 for services related
to the acquisition, development, exploration or evaluation of oil and gas
properties.

The Company is a guarantor of a $5.0 million loan from NationsBank, N.A. to
Tatham Brothers, which proceeds were used to fund certain improvements to the
Rigs. The loan bears interest at LIBOR plus 2% per annum and is due on September
30, 1999 or on demand. Mr. Tatham is also a co-guarantor of this loan.

NOTE 8 - INCOME TAXES:

The Company's deferred income tax liabilities (assets) at June 30, 1999 and 1998
consist of net operating loss ("NOL") carryforwards and the tax effect of
temporary differences between financial and tax reporting related to the
recognition of certain amounts as follows:

<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 1998
(in thousands)

<S> <C> <C>
Depreciable assets 11,355 --
----------- -----------
Gross deferred liability 11,355 --

NOL carryforwards (47,679) (45,531)
----------- -----------
Gross deferred asset (36,324) (45,531)
----------- -----------

Net deferred tax asset (36,324) (45,531)
Valuation allowances 36,324 45,531
----------- -----------
$ -- $ --
=========== ===========

</TABLE>

Because of the Company's cumulative losses, valuation allowances of $47,679,000
and $45,531,000 at June 30, 1999 and 1998, respectively, were provided against
the net deferred tax assets. At June 30, 1999, the Company had approximately
$140,231,000 of regular tax NOL carryforwards and approximately $139,043,000 of
alternative minimum tax NOL carryforwards. These losses begin to expire in the
year 2005. Substantial changes in a company's ownership can result in an annual
limitation on the utilization of federal income tax NOL carryforwards.

NOTE 9 - COMMITMENTS AND CONTINGENCIES:

The Nasdaq Stock Market, Inc. ("Nasdaq") listing criteria requires, among other
things, that a company listed on the Nasdaq National Market maintain a closing
bid price greater than or equal to $1.00 and that the company's common stock
must maintain a market value of public float greater than or equal to
$5,000,000. The Company was notified by Nasdaq that unless the Company was
able to demonstrate compliance with the $1.00 minimum bid price requirement and
the $5,000,000 market value of public stock requirement by May 12, 1999, the
Company's common stock would be delisted from the Nasdaq National Market at the
opening of business on May 13, 1999. The Company's common stock bid price had
not closed at a bid price greater than or equal to $1.00 in recent months and
the market value of the Company's common stock held by individuals and entities
which qualify under the definition of public float did not equal or exceed
$5,000,000 at the current trading level of the common stock. As a result,
effective May 13, 1999, the Company's common stock was no longer listed on the
Nasdaq National Market and began trading in the over the counter market.

F-21
<PAGE> 72

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In the ordinary course of business, the Company is subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the financial position or operations of
the Company. Various legal actions have arisen in the ordinary course of
business. Management believes that the outcome of such proceedings will not have
a material adverse effect on the consolidated financial position or results of
operations of the Company.

The Company anticipates substantial future capital expenditures associated with
the development and implementation of the North Atlantic pipeline project and
related opportunities in Atlantic Canada. Realization of the potential of the
North Atlantic pipeline project and related opportunities in Atlantic Canada is
dependent upon the ability of the Company to obtain sufficient additional
capital or project financing.

NOTE 10 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:

<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Cash paid for interest, net of
amounts capitalized $ 3,985 $ 1,707 $ 7,249

</TABLE>

Supplemental Disclosures of Noncash Investing and Financing Activities

<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Conversion of long-term debt to
common stock $ -- $ 60,000 $ --
Conversion of preferred stock to
common stock -- 540 1,129
Assignment of oil and gas properties and
abandonment obligations to a third party -- 1,200 --
Conveyance of Tatham Development to DeepTech
(Notes 1 and 2):
Conveyance of oil and gas properties -- 22,079 --
Exchange of DeepFlex indebtedness -- (8,000) --
Decrease in paid in capital -- (13,620) --
Reduction in other current assets -- 116 --
Reduction in abandonment obligations -- (400) --
Reduction in accounts payable -- (175) --
Issuance of restricted senior preferred stock 26 -- --
Debt issued to refinance accounts payable
to affiliates 5,153 -- --
Senior Preferred Stock redeemed under
the Redemption Agreement 7,500 -- --
Debt issued to finance Rights Offering 6,923 -- --
Expiration of minority interest 250 -- --

</TABLE>

F-22
<PAGE> 73

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

As discussed in Note 2, Tatham Offshore conveyed its remaining oil and gas
assets to Leviathan per the Redemption Agreement. The assets and liabilities
conveyed were as follows (in thousands):

<S> <C>
Cash $ (1,605)
Oil and gas properties, net (5,466)
Accounts payable 755
Accounts payable to DeepTech 1,062
Accounts payable to Leviathan 2,480
Other noncurrent liabilities 3,416
-----------
Increase in paid in capital $ 642
===========
</TABLE>

NOTE 11 - SUBSEQUENT EVENTS:

Bankruptcy Filing by Subsidiaries

On August 9, 1999, RIGCO, FPS VI, FPS III, Inc. and FPS V, Inc., wholly-owned
subsidiaries of DeepFlex, filed voluntary petitions under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Filing"). RIGCO owns a 100%
interest in the Bill Shoemaker and a 25% undivided interest in the Laffit
Pincay. FPS VI owns a 75% undivided interest in the Laffit Pincay. FPS III, Inc.
and FPS V, Inc. are the owners of RIGCO and FPS VI with FPS III, Inc. owning a
50% interest in RIGCO and FPS V, Inc. owning a 50% interest in RIGCO and a 100%
interest in FPS VI. The proceedings of RIGCO, FPS VI, FPS III, Inc. and FPS V,
Inc. have been consolidated for administrative purposes. As a result of the
Bankruptcy Filing, the Rigs are being managed by the Company's rig related
subsidiaries as debtors-in-possession. Under the provisions of the Bankruptcy
Code, the debtors-in-possession have the exclusive right, for 120 days following
the date of the Bankruptcy Filing, to file a plan of reorganization with the
Bankruptcy Court. Management intends to file such a plan. The syndicate of
lenders under the Credit Facility have a secured interest in substantially all
of the assets of RIGCO and FPS VI.

F-23
<PAGE> 74

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Following is the combined balance sheet and statement of operations at June 30,
1999 and the year then ended for the companies under the Bankruptcy Filing.

COMBINED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June 30,
1999
---------------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 382
Accounts receivable 16,034
Prepaid expenses 156
---------------
Total current assets 16,572
---------------

Semisubmersible drilling rigs 144,468
Less: Accumulated depreciation 12,154
---------------
Semisubmersible drilling rigs, net 132,314
---------------

Total assets $ 148,886
===============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Accounts payable and accrued liabilities $ 8,408
Accounts payable to affiliates 6,003
Notes payable to affiliates 79,357
Current portion of note payable 58,148
---------------
Total current liabilities 151,916
---------------

Deferred income taxes 10,238
---------------

Total liabilities 162,154
---------------

Stockholders' equity (deficit):
Common stock --
Additional paid-in capital 1,180
Accumulated deficit (14,448)
---------------
(13,268)
---------------

Total liabilities and stockholders' deficit $ 148,886
===============

</TABLE>

F-24
<PAGE> 75

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>

<S> <C>
Revenue:
Drilling services $ 39,846
Costs and expenses:
Drilling operating expenses 22,234
Depreciation 5,661
General and administrative expenses
and management fee 2,940
---------------
30,835
---------------

Operating income 9,011
Interest income 105
Interest expense and other financing costs (7,697)
Interest expense and other financing costs - affiliates (10,610)
---------------

Loss before income taxes (9,191)
Income tax (benefit) expense --
---------------
Net loss $ (9,191)
===============
</TABLE>

Lawsuit Against Schlumberger Technology Corporation

On July 26, 1999, RIGCO filed a petition in the 165th Judicial District Court in
Harris County, Texas, alleging more than $51 million in actual damages against
Schlumberger Technology Corporation and Schlumberger Canada, Ltd. (collectively,
"Schlumberger") for claims arising out of Schlumberger's Sedco Forex Division's
marketing, manning, management and operation of the Shoemaker and Pincay
pursuant to certain charter, make-ready and other agreements and arrangements.
The allegations include claims of gross negligence, breach of contract, fraud,
negligent misrepresentation and negligence. RIGCO is seeking an unspecified
amount of exemplary damages. RIGCO has alleged in bankruptcy court proceedings
that the manner in which Schlumberger performed its duties with respect to the
Bill Shoemaker and Laffit Pincay during the course of the management and charter
agreements resulted in RIGCO's financial difficulties and caused it to default
on its secured debt obligations.

NOTE 12 - SEGMENT INFORMATION:

The Financial Accounting Standards Board recently issued statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which is
effective for the Company's financial statements as of and for the year ending
June 30, 1999. This Statement requires reporting of summarized financial results
for operating segments as well as establishes standards for related disclosures
about products and services, geographic areas and major customers. Primary
disclosure requirements include total segment revenues, total segment profit or
loss and total segment assets. The Statement did not have an effect on the
Company's results of operations or financial position but did affect the
disclosure of segment information.

The Company currently operates in two segments, the offshore contract drilling
business and the pursuit of an integrated energy related investment strategy in
Atlantic Canada. The accounting policies of the reportable segments are the same
as those described in Note 3.

F-25
<PAGE> 76

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Summarized financial information of the Company's reportable segments for the
years ended June 30, 1999, 1998 and 1997 is shown in the following table. The
"Other" column includes results of oil and gas operations and corporate related
items.

Canada
Investment
Drilling Strategy Other Total
-------- ---------- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
1999
----
Revenues 39,846 -- -- 39,846
Depreciation 5,711 -- -- 5,711
Interest expense 9,571 -- 4,534 14,115
Segment profit 11,901 -- (20,383) (8,482)
Total assets 150,527 12,735 512 163,774
Capital expenditures 10,733 1,036 -- 11,769

1998
----
Revenues 672 -- -- 672
Depreciation 91 -- -- 91
Interest expense -- -- -- --
Segment profit 153 -- (4,964) (4,811)
Total assets 134,395 12,213 6,810(1) 153,418
Capital expenditures -- 10,212 352 10,564

1997
----
Revenues -- -- -- --
Depreciation -- -- -- --
Interest expense -- -- -- --
Segment profit -- -- (47,971) (47,971)
Total assets -- 1,317 40,190(2) 41,507
Capital expenditures -- 1,317 2,923 4,240

</TABLE>

(1) In connection with the merger of DeepTech into El Paso and related
transactions, $5.7 million of oil and gas properties were transferred to
DeepTech and Leviathan.
(2) In connection with the merger of DeepTech into El Paso and related
transactions, $30.7 million of oil and gas properties were transferred to
DeepTech and Leviathan.

Following is a summary of revenues and identifiable assets by geographic areas
for offshore contract drilling segments. Revenues are attributed to countries
based on the location of service provided.

Year Ended June 30,
-----------------------------------------------
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Contract revenue
United States $ 25,110 $ 672 $ --
Canada 14,736 -- --
------------ ------------ ------------
$ 39,846 $ 672 $ --
============ ============ ============
</TABLE>

June 30,
-----------------------------------------------
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Identifiable Assets
United States $ 52,280 $ 141,889 $ 40,190
Canada 111,494 11,529 1,317
------------ ------------ ------------
$ 163,774 $ 153,418 $ 41,507
============ ============ ============

</TABLE>

In fiscal year 1999, Shell accounted for $22.9 million and Husky Oil Operations
Limited accounted for $14.7 million of drilling services revenue. No other
customer accounted for more than 10 percent of consolidated revenue in 1999.

F-26
<PAGE> 77

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 13 - SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED):

Oil and Gas Reserves

The following table represents the Company's net interest in estimated
quantities of developed and undeveloped reserves of crude oil, condensate and
natural gas and changes in such quantities at fiscal year end 1999, 1998 and
1997. On August 14, 1998 all of the Company's oil and gas operations were
transferred to Leviathan (See Note 2). Estimates of the Company's reserves at
June 30, 1998 have been made by the Company's reserve engineers. Estimates of
the Company's reserves at June 30, 1997 and 1996 have been made by the
independent engineering consulting firm, Ryder Scott Company Petroleum
Engineers. Net proved reserves are the estimated quantities of crude oil and
natural gas which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed reserves are proved reserve
volumes that can be expected to be recovered through existing wells with
existing equipment and operating methods. Proved undeveloped reserves are proved
reserve volumes that are expected to be recovered from new wells on undrilled
acreage or from existing wells where a significant expenditure is required for
recompletion.

Estimates of reserve quantities are based on sound geological and engineering
principles, but, by their very nature, are still estimates that are subject to
substantial upward or downward revision as additional information regarding
producing fields and technology becomes available.

Oil/Condensate Natural gas
(barrels) (Mcf)
-------------- -----------
(In thousands)
<S> <C> <C>
Proved reserves -- June 30, 1996 5,699 54,981
Revisions of previous estimates (a) (5,440) (36,049)
Extensions, discoveries and other additions 36 540
Production (170) (7,180)
--------------- ----------------
Proved reserves -- June 30, 1997 125 12,292
Revisions of previous estimates (47) (77)
Extensions, discoveries and other additions -- --
Production (16) (4,532)
--------------- ----------------
Proved reserves -- June 30, 1998 62 7,683
Revisions of previous estimates
Extensions, discoveries and other additions
Production
Sales of reserves in place (b) (62) (7,683)
--------------- ----------------
Proved reserves - June 30, 1999 0 0
=============== ================

Proved developed reserves - June 30, 1997 125 12,292
=============== ================
Proved developed reserves - June 30, 1998 62 7,683
=============== ================
Proved developed reserves - June 30, 1999 0 0
=============== ================
</TABLE>
- ----------------------------------------
(a) The revisions of previous estimates of proved reserves from June 30, 1996
to June 30, 1997 were caused by (i) the elimination of 3.2 million barrels
of oil and 24,369 MMcf of gas as a result of the assignment of the working
interests in Ship Shoal Block 331 and (ii) the elimination of 2.1 million
barrels of oil and 3,178 MMcf of gas as a result of the abandonment of the
Ewing Bank Block 914 #2 well.
(b) In connection with the transfer of all the operating oil and gas properties
to Leviathan.

F-27
<PAGE> 78

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

reserves attributable to any particular group of properties, classifications of
such reserves based on risk of recovery and estimates of the future net revenues
expected therefrom, prepared by different engineers or by the same engineers at
different sites, may vary substantially. The meaningfulness of such estimates is
highly dependent upon the assumptions upon which they are based.

Furthermore, Tatham Offshore's wells have only been producing for a short period
of time and, accordingly, estimates of future production were based on this
limited history. Estimates with respect to proved reserves that may be developed
and produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than upon actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves. A significant portion of Tatham Offshore's reserves were
based upon volumetric calculations.

Future Net Cash Flows

The standardized measure of discounted future net cash flows relating to the
Company's proved oil and gas reserves is calculated and presented in accordance
with SFAS No. 69, "Disclosures About Oil and Gas Producing Activities."
Accordingly, future cash inflows were determined by applying year-end oil and
gas prices to the Company's estimated share of future production from proved oil
and gas reserves. The average prices utilized in the calculation of the
standardized measure of discounted future net cash flows at June 30, 1998 were
$12.28 per barrel of oil and $1.76 per Mcf of gas. Future production and
development costs were computed by applying year-end costs to future years.
Future income taxes were derived by applying year-end statutory tax rates to the
estimated net future cash flows taking into consideration the Company's NOL
carryforwards. A prescribed 10% discount factor was applied to the future net
cash flows.

In the Company's opinion, this standardized measure is not a representative
measure of fair market value, and the standardized measure presented for the
Company's proved oil and gas reserves is not representative of the reserve
value. The standardized measure is intended only to assist financial statement
users in making comparisons between companies.

<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Future cash inflows $ -- $ 14,267 $ 31,512
Future production costs -- 9,174 16,750
Future development costs -- 1,546 2,096
Future income tax expenses -- -- --
------------ ------------ ------------
Future net cash flows 3,547 12,666
Annual discount at 10% rate -- 138 1,623
------------ ------------ ------------
Standardized measure of discounted future
net cash flows $ -- $ 3,409 $ 11,043
============ ============ ============
</TABLE>

June 30, 1999
-----------------------------------------------
Proved Proved
Developed Undeveloped Total
--------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Undiscounted estimated future net cash flows
from proved reserves before income taxes $ 0 $ 0 $ 0
============ ============ ============
Present value of future net cash flows from
proved reserves before income taxes,
discounted at 10% $ 0 $ 0 $ 0
============ ============ ============

</TABLE>

F-28
<PAGE> 79

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following are the principal sources of change in the standardized measure
(in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Beginning of year $ 3,409 $ 11,043 $ 89,994
Sales and transfers of oil and gas produced,
net of production costs (3,409) (2) (5,699) (13,771)
Net changes in prices and production costs -- (3,198) (35,355)
Extensions, discoveries and improved
recovery, less related costs -- -- 627
Changes in estimated future development costs -- 502 28,959
Previously estimated development costs
incurred during the year -- 5 2,976
Revisions of previous quantity estimates -- (198) (47,259) (1)
Purchase of reserves in place -- -- --
Sales of reserves in place -- -- --
Net change in income taxes -- -- --
Accretion of discount -- 1,104 8,999
Changes in production rates, timing and other -- (150) (24,127)
------------ ------------ ------------
End of year $ 0 $ 3,409 $ 11,043
============ ============ ============
</TABLE>

- -----------------------------
(1) The revisions of previous estimates of proved reserves from June 30, 1996
to June 30, 1997 were caused by (i) the elimination of 3.2 million barrels
of oil and 24,369 MMcf of gas as a result of the assignment of the working
interests in Ship Shoal Block 331 and (ii) the elimination of 2.1 million
barrels of oil and 3,178 MMcf of gas as a result of the abandonment of the
Ewing Bank Block 914 #2 well.
(2) In connection with the transfer of all of the Company's oil and gas
properties to Leviathan.

F-29

<PAGE> 80
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Restated Certificate of Incorporation of Tatham Offshore
(filed as exhibit 3.1 in Tatham Offshore's Annual Report
on Form 10-K for the fiscal year ended June 30, 1994,
and incorporated herein by reference).

3.2 By-laws of Tatham Offshore (filed as exhibit 3.2 in
Tatham Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein
by reference).

<PAGE> 81

<TABLE>
<S> <C>
4.6 Warrant Agreement relating to the warrants entitling the
holder thereof to purchase shares of Convertible
Exchangeable Preferred Stock (filed as Exhibit 4.5 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).

<PAGE> 82
<TABLE>
<S> <C>
10.11 Agreement for Purchase and Sale by and between Tatham
Offshore, Inc., as Seller, and Flextrend Development
Company, L.L.C., as Buyer, dated June 30, 1995 (filed as
Exhibit 6(a) to the Leviathan Gas Pipeline Partners,
L.P. Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, Commission File Number 1-11680 and
incorporated herein by reference).

10.20 Limited Liability Company Agreement of Deepwater
Drillers, L.L.C. (filed as Exhibit 10.2 to DeepTech's
Current Report on Form 8-K dated May 2, 1996 and
incorporated herein by reference).

<PAGE> 83
<TABLE>
<S> <C>
10.23 Standby Agreement dated February 27, 1998, between
DeepTech International Inc., Tatham Offshore, Inc.,
Thomas P. Tatham, Tatham Brothers, LLC, and El Paso
Natural Gas Company (filed as Exhibit 10.27 to Tatham
Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein by
reference).

<PAGE> 84
<TABLE>
<S> <C>
10.32 Fifth Amendment dated June 16, 1998 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent (filed as Exhibit 10.32 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, and incorporated herein by
reference).

<PAGE> 85
<TABLE>
<S> <C>
10.44 First Amendment to Management Agreement between RIGCO
North America, L.L.C. and DeepTech dated as of May 1,
1997 (filed as Exhibit 10.39 to DeepTech's Annual Report
on Form 10-K/A for the fiscal year ended June 30, 1997,
Commission File No. 0-23934 and incorporated herein by
reference).

21.1* List of Subsidiaries of Tatham Offshore, Inc.

23.1* Consent of Independent Accountants,
PricewaterhouseCoopers LLP.

24.1 Powers of Attorney (included on the signature page on
this Annual Report on Form 10-K).

27.1* Financial Data Schedules.
- --------------

* Filed herewith
</TABLE>

<PAGE> 1
EXHIBIT 10.48

SEVENTH AMENDMENT

SEVENTH AMENDMENT, dated as of March 30, 1999 (this "Seventh
Amendment"), to the Credit Agreement, dated as of September 30, 1996 (as
amended by the Global Amendment and Assignment and Acceptance, dated as of
October 9, 1996, the Second Amendment, dated as of April 23, 1997, the Third
Amendment, dated as of May 13, 1997, the Fourth Amendment, dated as of July 31,
1997, the Fifth Amendment, dated as of June 16, 1998, and the Sixth Amendment,
dated as of September 25, 1998, and as may be further amended, supplemented or
otherwise modified from time to time, the "Credit Agreement"), among RIGCO
NORTH AMERICA, L.L.C., a Delaware limited liability company (the "Borrower"),
the several banks and other financial institutions from time to time parties
thereto (the "Lenders"), LEHMAN COMMERCIAL PAPER INC. ("LCPI"), as Advisor,
Syndication Agent and Arranger, HIBERNIA NATIONAL BANK, as Collateral and
Documentation Agent and BHF-BANK AKTIENGESELLSCHAFT, as Administrative Agent.

W I T N E S S E T H

WHEREAS, pursuant to the Credit Agreement, the Lenders have
agreed to make, and have made, certain Loans to the Borrower; and

WHEREAS, the Borrower has requested that the Lenders amend
and waive, and the Lenders have agreed to amend and waive, certain of the
provisions of the Credit Agreement, upon the terms and subject to the
conditions set forth below;

NOW, THEREFORE, the parties hereto hereby agree as follows:

1. Defined Terms. As used herein, terms defined in this
Seventh Amendment or in the Credit Agreement are used herein as so defined.

2. Amendment to Subsection 2.3. Subsection 2.3 of the Credit
Agreement is hereby amended by deleting the date "March 31, 1999" contained in
the table therein and substituting in lieu thereof the date "April 30, 1999".

3. Amendment to Subsection 2.6(c). Subsection 2.6(c) of the
Credit Agreement is hereby amended by adding thereto immediately at the end
thereof but prior to the period the following: "provided, further, that the
interest payment payable on March 31, 1999 shall instead be due and payable on
April 30, 1999".

4. Waiver of Financial Covenants. The Lenders hereby waive
compliance by the Borrower with the financial condition covenants contained in
subsection 6.1 of the Credit Agreement for the period from March 31, 1999
through April 30, 1999.

5. Overdue Interest. Notwithstanding the amendments set forth
in paragraphs 2 and 3 of this Seventh Amendment, interest on the outstanding
principal amount of the Loans and on the interest payment which was formerly
due on March 31, 1999 shall accrue

<PAGE> 2
2

during the period of April 1, 1999 through April 30, 1999 at the rate set forth
in subsection 2.6(b) of the Credit Agreement.

6. Effectiveness. The amendments and waivers provided for
herein shall become effective on the date (the "Effective Date") of
satisfaction of the following conditions precedent:

(a) The Administrative Agent shall have received counterparts
of (i) this Seventh Amendment, duly executed and delivered by the
Borrower and each of the other parties hereto, (ii) the Second
Amendment, dated as of the date hereof, to the Warrant Agreement,
dated as of September 30, 1996, between the Borrower and Lehman
Brothers Inc., duly executed and delivered by the parties thereto and
(iii) the Second Amendment, dated as of the date hereof, to the
Warrant Agreement, dated as of June 16, 1998, between FPS VI, L.L.C.
and Lehman Brothers Inc., duly executed and delivered by the parties
thereto.

(b) All governmental and third party approvals (including
landlords' and other consents) necessary or advisable in connection
with this Seventh Amendment shall have been obtained and be in full
force and effect, and all applicable waiting periods shall have
expired without any action being taken or threatened by any competent
authority which would restrain, prevent or otherwise impose materially
adverse conditions on the Credit Agreement as amended by this Seventh
Amendment.

(c) All limited liability company and other proceedings, and
all documents, instruments and other legal matters in connection with
the transactions contemplated by this Seventh Amendment shall be
satisfactory in form and substance to the Arranger and the
Administrative Agent.

(d) LCPI shall have received for the accounts of the Lenders
an amendment fee in an amount equal to $100,000.

7. Representations and Warranties. After giving effect to the
amendments and waivers contained herein, on the Effective Date, the Borrower
hereby confirms, reaffirms and restates the representations and warranties set
forth in Section 3 of the Credit Agreement; provided that each reference in
such Section 3 to "this Agreement" shall be deemed to be a reference both to
this Seventh Amendment and to the Credit Agreement as amended by this Seventh
Amendment.

8. Continuing Effect; No Other Amendments. Except as
expressly amended or waived hereby, all of the terms and provisions of the
Credit Agreement and the other Loan Documents are and shall remain in full
force and effect. The amendments and waivers contained herein shall not
constitute an amendment or waiver of any other provision of the Credit
Agreement or the other Loan Documents or for any purpose except as expressly
set forth herein.

<PAGE> 3
3

9. No Default. No Default or Event of Default shall have
occurred and be continuing as of the Effective Date after giving effect to this
Seventh Amendment.

10. Costs and Expenses. The Borrower agrees to pay the
reasonable costs and expenses of the Administrative Agent, the Collateral and
Documentation Agent and the Arranger in connection with this Seventh Amendment,
including, without limitation, legal fees and expenses.

11. Counterparts. This Seventh Amendment may be executed in
any number of counterparts by the parties hereto, each of which counterparts
when so executed shall be an original, but all the counterparts shall together
constitute one and the same instrument.

12. GOVERNING LAW. THIS SEVENTH AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK.

<PAGE> 4
4

IN WITNESS WHEREOF, the parties have caused this Seventh
Amendment to be duly executed and delivered by their respective proper and duly
authorized officers as of the day and year first above written.

RIGCO NORTH AMERICA, L.L.C.

By:
Title:

BHF-BANK AKTIENGESELLSCHAFT, as
Administrative Agent and as a Lender

By:
Title:

HIBERNIA NATIONAL BANK, as Collateral
and Documentation Agent and as a Lender

By:
Title:

LEHMAN COMMERCIAL PAPER INC., as
Syndication Agent and as a Lender

By:
Title:

<PAGE> 5
5

MERRILL LYNCH PRIME RATE PORTFOLIO

By: MERRILL LYNCH ASSET MANAGEMENT
L.P., as Investment Adviser

By:

Title:

MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.

By:

Title:

MERRILL LYNCH DEBT STRATEGIES PORTFOLIO

By: MERRILL LYNCH ASSET MANAGEMENT L.P.,
as Investment Adviser

By:

Title:

SENIOR HIGH INCOME PORTFOLIO, INC.

By:

Title:

<PAGE> 6
6

VAN KAMPEN AMERICAN CAPITAL PRIME RATE
INCOME TRUST

By:
Title:

<PAGE> 1
EXHIBIT 10.49

PROMISSORY NOTE

$750,000.00 June 30, 1999

For value received, the undersigned, RIGCO North America, L.L.C., a
Delaware limited liability company (the "Borrower"), hereby promises to pay to
the order of Tatham Investment Corp., a Cayman entity, (the "Lender"), on or
before September 30, 1999 (the "Maturity Date"), the lesser of (i) SEVEN HUNDRED
FIFTY THOUSAND DOLLARS AND NO CENTS ($750,000.00), and (ii) the aggregate unpaid
principal amount of all loans made by the Lender to the Borrower hereunder, with
interest as specified herein.

This Note is subject to the following additional provisions, terms and
conditions:

1. Committed Draw Facility. The Lender agrees, on the terms and
conditions of this Note, to make credit loans to the Borrower during the period
from and including the date hereof to and including the Maturity Date, in a
maximum aggregate principal amount of up to $750,000.00.

2. Principal. To the extent not previously paid, the entire unpaid
principal balance hereof plus all accrued but unpaid interest thereon shall be
due and payable on the Maturity Date. All principal payments shall be
accompanied by accrued interest on the principal amount being repaid to the date
of payment. The Borrower may at any time and from time to time prepay all or any
part of the unpaid principal balance of this Note without premium or penalty,
but prepayments of less than all of the unpaid principal balance of this Note
shall be in the minimum amount of $10,000 and in integral multiples thereof.

3. Interest.

(a) The Borrower agrees to pay interest in respect of the
unpaid principal amount of this Note from the date of advance thereof to
maturity (whether by acceleration or otherwise) at a varying rate per annum
equal to the lesser of (i) the Base Rate (as defined below) plus three percent
(3%) per annum, and (ii) the maximum nonusurious interest rate permitted by
applicable law (the "Maximum Rate"). Overdue principal shall bear interest,
before and after judgment, for each day that such amounts are overdue at a
varying rate per annum equal to the lesser of (i) the Base Rate plus three
percent (3%) per annum, and (ii) the Maximum Rate.

(b) As used in this Note, (i) the term "Base Rate" shall have
the same meaning as given to such term in the Credit Agreement, dated as of
September 30, 1996 (as amended), among the Borrower, the several banks and other
financial institutions from time to time parties thereto, Lehman Commercial
Paper Inc., as Advisor, Syndication Agent and Arranger, Hibernia National Bank,
as Collateral and Documentation Agent and BHF-Bank Aktiengesellschaft, as
Administrative Agent ("Borrower Credit Agreement"), and (ii) "Business Day"
shall mean any day of the week except Saturday, Sunday or any other day when
national banks are closed.

<PAGE> 2

(c) Interest on the principal of this Note shall accrue from
and including the date of each advance to, but excluding the date of any
repayment thereof, and shall be payable (i) upon the payment or prepayment, in
full or in part, of any of the principal amount of this Note, (ii) at the
maturity of this Note (whether by acceleration or otherwise), and (iii) after
maturity (whether by acceleration or otherwise), on demand.

4. Payments in General. All payments under this Note shall be made
without defense, setoff or counterclaim to the Lender not later than 12:00 noon
(Houston, Texas time) on the date when due and shall be made in lawful money of
the United States of America in immediately available funds. Whenever any
payment to be made under this Note shall be stated to be due on a day that is
not a Business Day, the due date thereof shall be extended to the next
succeeding Business Day, and, with respect to payments of principal, interest
thereon shall be payable at the applicable rate during such extension. Each
payment received by the Lender shall be applied first to late charges and
collection expenses, if any, then to the payment of accrued but unpaid interest
due hereunder, and then to the reduction of the unpaid principal balance hereof.

5. Events of Default. The occurrence of any of the following events
shall constitute an "Event of Default" under this Note:

(i) The Borrower shall fail to pay when due any principal of
or interest on this Note when and as the same shall become due and payable,
whether at the Maturity Date, by acceleration hereof or otherwise, and such
default shall continue unremedied for five (5) consecutive Business Days after
receipt by the Borrower of written notice of such default; or

(ii) The Borrower (A) shall file for relief under any
bankruptcy law or (B) shall be the subject of an involuntary petition under any
such law and such involuntary petition is not stayed or dismissed within thirty
(30) days after the date thereof.

6. Remedies. At any time during the continuance of an Event of Default
under Section 5(i), the Lender may declare the entire unpaid principal balance
of this Note, together with all accrued but unpaid interest thereon, immediately
due and payable, and may proceed to enforce payment of the same and to exercise
any and all of the rights and remedies afforded herein as well as all other
rights and remedies possessed by the Lender by law or otherwise. Upon the
occurrence of an Event of Default under Section 5(ii), the entire unpaid
principal balance of this Note, together with all accrued but unpaid interest
thereon, shall automatically and immediately become due and payable, and
thereafter the Lender may proceed to enforce payment of the same and to exercise
any and all of the rights and remedies afforded herein as well as all other
rights and remedies possessed by the Lender by law or otherwise.

7. No Waiver by Lender. No failure or delay on the part of the Lender
in exercising any right, power or privilege hereunder and no course of dealing
between the Borrower and the Lender shall operate as a waiver thereof; nor shall
any single or partial exercise of any right, remedy, power or privilege
hereunder preclude any other or further exercise thereof or the exercise of any
other right, remedy, power or privilege.

<PAGE> 3

8. Waivers. Except as otherwise expressly provided for herein, the
makers, signers, sureties, guarantors and endorsers of this Note severally waive
notice of acceptance of this Note, notice of extension of credit, demand,
presentment, notice of presentment, notice of dishonor, notice of intent to
demand or accelerate payment hereof, notice of demand, notice of acceleration,
diligence in collecting, grace, notice and protest, and agree to one or more
renewals or extensions for any period or periods of time, partial payments and
releases or substitutions of security, in whole or in part, with or without
notice, before or after maturity. If this Note shall be collected by legal
proceedings or through a bankruptcy court, or shall be placed in the hands of an
attorney for collection after default or maturity, the Borrower agrees to pay
all costs of collection, including reasonable attorneys' fees.

9. Limitation on Interest. Notwithstanding any other provision of this
Note, interest on the indebtedness evidenced by this Note is expressly limited
so that in no contingency or event whatsoever, whether by acceleration of the
maturity of this Note or otherwise, shall the interest contracted for, charged
or received by the Lender exceed the maximum amount permissible under applicable
law. If from any circumstances whatsoever fulfillment of any provisions of this
Note or of any other document evidencing, securing or pertaining to the
indebtedness evidenced hereby, at the time performance of such provision shall
be due, shall involve transcending the limit of validity prescribed by law,
then, ipso facto, the obligation to be fulfilled shall be reduced to the limit
of such validity, and if from any such circumstances the Lender shall ever
receive anything of value as interest or deemed interest by applicable law under
this Note or any other document evidencing, securing or pertaining to the
indebtedness evidenced hereby or otherwise an amount that would exceed the
highest lawful rate, such amount that would be excessive interest shall be
applied to the reduction of the principal amount owing under this Note or on
account of any other indebtedness of the Borrower to the Lender, and not to the
payment of interest, or if such excessive interest exceeds the unpaid balance of
principal of this Note and such other indebtedness, such excess shall be
refunded to the Borrower. In determining whether or not the interest paid or
payable with respect to any indebtedness of the Borrower to the Lender, under
any specific contingency, exceeds the highest lawful rate, the Borrower and the
Lender shall, to the maximum extent permitted by applicable law, (a)
characterize any non-principal payment as an expense, fee or premium rather than
as interest, (b) exclude voluntary prepayments and the effects thereof, (c)
amortize, prorate, allocate and spread the total amount of interest throughout
the full term of such indebtedness so that the actual rate of interest on
account of such indebtedness does not exceed the maximum amount permitted by
applicable law, and/or (d) allocate interest between portions of such
indebtedness, to the end that no such portion shall bear interest at a rate
greater than that permitted by applicable law. The terms and provisions of this
paragraph shall control and supersede every other conflicting provision of this
Note and all other agreements between the Borrower and the Lender.

10. Choice of Law. This Note and the validity and enforceability hereof
shall be governed by and construed in accordance with the laws of the State of
New York other than the conflicts of laws rules thereof.

<PAGE> 4

EXECUTED as of the 30th day of June, 1999.

BORROWER:

RIGCO NORTH AMERICA, L.L.C.

By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------

The Lender hereby accepts this Note and, subject to the terms and
conditions hereof, agrees to make the loans contemplated herein.

LENDER:

TATHAM INVESTMENT CORP.

By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------

<PAGE> 1

EXHIBIT 10.50

REVOLVING DEMAND PROMISSORY NOTE

$5,000,000.00 JULY 1, 1999

For value received, the undersigned, TATHAM OFFSHORE, INC., a Delaware
corporation ("Borrower"), hereby promises to pay to the order of TATHAM
INVESTMENT CORP., a Cayman entity, ("Lender"), 7400 Chase Tower, Houston, Texas
77002, or at such other place as from time to time may be designated by the
holder of this Revolving Promissory Note (this "Note"), in immediately
available United States Dollars, the lesser of (i) FIVE MILLION DOLLARS AND NO
CENTS ($5,000,000.00), and (ii) the aggregate unpaid principal amount of all
loans made by Lender to Borrower hereunder, with interest as specified herein,
in the manner provided below.

This Note is subject to the following additional provisions, terms and
conditions:

1. Revolving Draw Facility. Lender agrees, on the terms and
conditions of this Note, to make credit loans to Borrower during the period
from and including the date hereof to and including the Maturity Date
(hereinafter defined), in a maximum aggregate principal amount of up to
$5,000,000.00. Borrower may borrow, repay, and reborrow from time to time from
Lender any amount or amounts as requested by Borrower, which are approved by
Lender in its sole discretion, provided that at no time shall there be more
than $5,000,000.00 outstanding to Borrower. Borrower shall request an advance
under this Note by written notice to Lender and Lender shall, at its option,
fund such request for advance within three (3) business days after receipt of
such request from Borrower. Lender shall be under no obligation to fund each
request for advance from Borrower.

2. Principal. To the extent not previously paid, the entire
unpaid principal balance hereof plus all accrued but unpaid interest thereon
shall be due and payable upon written demand (and at the sole discretion) of
Lender (the "Maturity Date"). All principal payments shall be accompanied by
accrued interest on the principal amount being repaid to the date of payment.
Borrower may at any time and from time to time prepay all or any part of the
unpaid principal balance of this Note without premium or penalty, but
prepayments of less than all of the unpaid principal balance of this Note shall
be in the minimum amount of $10,000.00 and in integral multiples thereof.

3. Interest.

(a) Borrower agrees to pay interest in respect of the
unpaid principal amount of this Note from the date of advance thereof to the
Maturity Date at a rate per annum equal to 15%. Overdue principal shall bear
interest, before and after judgment, for each day that such amounts are overdue
at a varying rate per annum equal to the lesser of (i) 18% and (ii) the maximum
nonusurious interest rate permitted by applicable law.

Page 1 of 4
<PAGE> 2
(b) As used in this Note, "Business Day" shall mean any
day of the week except Saturday, Sunday or any other day when national banks
are closed.

(c) Interest on the principal of this Note shall accrue
from and including the date of each advance to, but excluding the date of any
repayment thereof, and shall be payable (i) upon the payment or prepayment, in
full or in part, of any of the principal amount of this Note, and (ii) on
written demand by Lender.

4. Payments in General. All payments under this Note shall be
made without defense, setoff or counterclaim to the Lender not later than 12:00
noon (Houston, Texas time) on the date when due and shall be made in lawful
money of the United States of America in immediately available funds. Whenever
any payment to be made under this Note shall be stated to be due on a day that
is not a Business Day, the due date thereof shall be extended to the next
succeeding Business Day, and, with respect to payments of principal, interest
thereon shall be payable at the applicable rate during such extension. Each
payment received by Lender shall be applied first to late charges and
collection expenses, if any, then to the payment of accrued but unpaid interest
due hereunder, and then to the reduction of the unpaid principal balance
hereof.

5. Security. The obligations under this Note shall hereby be
secured by a first lien and security interest in all of Borrower's right, title
and interest in and to (i) North Atlantic Pipeline Company, L.L.C., a Delaware
limited liability company and wholly-owned subsidiary of Borrower, (ii) Tatham
Offshore Canada Limited, a Nova Scotia company and wholly-owned subsidiary of
Borrower, (iii) DeepFlex Production Services, Inc., a Delaware corporation and
wholly- owned subsidiary of Borrower, (iv) North Atlantic Pipeline, Inc., a
Canadian Federal corporation and indirect wholly- owned subsidiary of Borrower,
and (v) that certain Revolving Demand Promissory Note dated as of July 1, 1999,
issued by Tatham Offshore Canada Limited in favor of Borrower, in the maximum
aggregate principal amount of up to $25,000,000.00.

6. No Waiver by Lender. No failure or delay on the part of
Lender in exercising any right, power or privilege hereunder and no course of
dealing between Borrower and Lender shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, remedy, power or privilege
hereunder preclude any other or further exercise thereof or the exercise of any
other right, remedy, power or privilege.

7. Waivers. Except as otherwise expressly provided for herein,
the makers, signers, sureties, guarantors and endorsers of this Note severally
waive notice of acceptance of this Note, notice of extension of credit, demand,
presentment, notice of presentment, notice of dishonor, notice of intent to
demand or accelerate payment hereof, notice of demand, notice of acceleration,
diligence in collecting, grace, notice and protest, and agree to one or more
renewals or extensions for any period or periods of time, partial payments and
releases or substitutions of security, in whole or in part, with or without
notice, before or after the Maturity Date. If this Note shall be collected by
legal proceedings or through a bankruptcy court, or shall be placed in the
hands of an attorney for collection after default or maturity, Borrower agrees
to pay all costs of collection, including reasonable attorneys' fees.

Page 2 of 4
<PAGE> 3
8. Limitation on Interest. Notwithstanding any other provision
of this Note, interest on the indebtedness evidenced by this Note is expressly
limited so that in no contingency or event whatsoever shall the interest
contracted for, charged or received by Lender exceed the maximum amount
permissible under applicable law. If from any circumstances whatsoever
fulfillment of any provisions of this Note or of any other document evidencing,
securing or pertaining to the indebtedness evidenced hereby, at the time
performance of such provision shall be due, shall involve transcending the
limit of validity prescribed by law, then, ipso facto, the obligation to be
fulfilled shall be reduced to the limit of such validity, and if from any such
circumstances Lender shall ever receive anything of value as interest or deemed
interest by applicable law under this Note or any other document evidencing,
securing or pertaining to the indebtedness evidenced hereby or otherwise an
amount that would exceed the highest lawful rate, such amount that would be
excessive interest shall be applied to the reduction of the principal amount
owing under this Note or on account of any other indebtedness of Borrower to
Lender, and not to the payment of interest, or if such excessive interest
exceeds the unpaid balance of principal of this Note and such other
indebtedness, such excess shall be refunded to Borrower. In determining
whether or not the interest paid or payable with respect to any indebtedness of
Borrower to Lender, under any specific contingency, exceeds the highest lawful
rate, Borrower and Lender shall, to the maximum extent permitted by applicable
law, (a) characterize any non-principal payment as an expense, fee or premium
rather than as interest, (b) exclude voluntary prepayments and the effects
thereof, (c) amortize, prorate, allocate and spread the total amount of
interest throughout the full term of such indebtedness so that the actual rate
of interest on account of such indebtedness does not exceed the maximum amount
permitted by applicable law, and/or (d) allocate interest between portions of
such indebtedness, to the end that no such portion shall bear interest at a
rate greater than that permitted by applicable law. The terms and provisions
of this paragraph shall control and supersede every other conflicting provision
of this Note and all other agreements between Borrower and Lender.

9. Choice of Law. This Note and the validity and enforceability
hereof shall be governed by and construed in accordance with the laws of the
State of New York other than the conflicts of laws rules thereof.

[Remainder of Page Intentionally Left Blank.]

Page 3 of 4
<PAGE> 4

IN WITNESS WHEREOF, Borrower has executed and delivered this Note as
of the date first written above.

BORROWER:

TATHAM OFFSHORE, INC.

By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------

Lender hereby accepts this Note and, subject to the terms and
conditions hereof, agrees to make the loans contemplated herein.

LENDER:

TATHAM INVESTMENT CORP.

By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------

Page 4 of 4

<PAGE> 1
EXHIBIT 21.1

LIST OF SUBSIDIARIES

<TABLE>
<CAPTION>
State or Other
Jurisdiction of
Subsidiary Name Incorporation
--------------- ----------------
<S> <C>
North Atlantic Pipeline Company, L.L.C. Delaware
North Atlantic Pipeline Partners, L.P. Delaware
North Atlantic Pipeline Partners, L.P. Newfoundland, Canada
North Atlantic Pipeline Company Nova Scotia, Canada
Tatham Offshore (Jersey) Ltd. Jersey, Channel Islands
Tatham Offshore Canada Limited Nova Scotia, Canada
Berg Masters Limited Newfoundland Canada
North Atlantic Hydrocarbons Marketing, Inc. Newfoundland, Canada
DeepFlex Production Services, Inc. Delaware
FPS II, Inc. Delaware
FPS III, Inc. Delaware
FPS IV, Inc. Delaware
FPS V, Inc. Delaware
FPS VI, L.L.C. Delaware
DeepFlex Holdings, L.L.C. Delaware
RIGCO North America, L.L.C. Delaware
DeepFlex Production Partners, L.P. Delaware
</TABLE>

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-96274) of Tatham Offshore, Inc. of our report
dated September 28, 1999 relating to the financial statements, which appears on
page F-2 in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
- ---------------------------------
PRICEWATERHOUSECOOPERS LLP

Houston, Texas
September 28, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TATHAM
OFFSHORE INC. AND SUBSIDIARES AUDITED FINANCIAL STATEMENTS AT JUNE 30, 1999
INCLUDED IN ITS FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 486
<SECURITIES> 0
<RECEIVABLES> 16,076
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,730
<PP&E> 146,487
<DEPRECIATION> 12,204
<TOTAL-ASSETS> 163,774
<CURRENT-LIABILITIES> 102,851
<BONDS> 0
0
176
<COMMON> 261
<OTHER-SE> 60,486
<TOTAL-LIABILITY-AND-EQUITY> 163,774
<SALES> 39,846
<TOTAL-REVENUES> 39,846
<CGS> 22,234
<TOTAL-COSTS> 22,234
<OTHER-EXPENSES> 5,711
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,115
<INCOME-PRETAX> (8,261)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,316)
<DISCONTINUED> (221)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,537)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)

</TABLE>